What's been more ambiguous is the net effect on poverty or welfare. Sure, some folks lose their jobs. But other folks get more money.
My colleague Guy Lacroix has brought to my attention a recent study that suggests that when minimum wages are increased in Canada, the net effect on poverty rates turns out to be positive.The Canadian study suggests a 10% increase in the minimum wage yields about a 5% increase in the percentage of families living below Canada's Low Income Cut-Off line. If those results held in New Zealand, increasing the minimum wage from $12.75 an hour to the union-demanded $15, an 18% increase, would increase the proportion of NZ families in poverty by about 9%. Results here could reasonably vary: labour demand elasticities may not be the same and incidence of the minimum wage will vary as well. But it ought to be our base guess from which we'd adjust for New Zealand conditions.
The study in question was written by Aninda Sen and two of his U of Waterloo colleagues, and it recently appeared in Labour Economics. (If the link to the Labour Economics site doesn't work, there's an ungated version on his web page.)
The first set of results address the question of the effects of minimum wages on teen employment (2/3 of minimum wage workers live at home or with a family member) and obtains estimates consistent with the existing literature.
Of particular interest are the results in Section 5.4 and Table 4, which estimate the effects of changes in the minimum wage on the proportion of families with income below the LICO. Here, we see that the effect of a minimum wage increase on the incidence of poverty is significantly positive, and the effect is most strongly felt in two-parent households. The effect on older workers is insignificant.
As far as I can tell, the story the authors want to get across goes something like this: most minimum wage earners are young, and the income of these workers is a significant contribution to low-income households. For families in which the minimum wage worker keeps her job, the increase in the minimum wage can increase family income above the LICO so long as hours worked are not significantly affected. For families in which the minimum wage worker loses her job and/or loses too many hours, the lost income may bring family income below the LICO. Canadian data suggest that the latter effect dominates: the net effect of an increase in minimum wages on poverty rates is positive:From a policy perspective, a common argument has been that even if a higher minimum wage does result in lower employment for some, the corresponding welfare costs are low since the number of minimum wage earners as a proportion of the labour force is relatively low. Further, the effects of unemployment (from a minimum wage hike) may not be severe as a significant majority of minimum wage earners live with another family member. Therefore, a higher minimum wage should unambiguously make lower wage earners better off through higher earnings, and therefore, a reduced incidence of poverty.For once, the traditional final sentence of academic research papers is not empty boilerplate:
Our results suggest the contrary. The ‘negative’ effects of an increase in the minimum wage might not be restricted to higher teen unemployment. A higher minimum wage may paradoxically result in more poverty as teen unemployment results in a drop in household income among low-income families. Therefore, the negative spillovers of a higher minimum wage may be significant and mitigate the benefits of higher earnings to the working poor who remain employed.At the very least, the results of this study suggest the need for more research on the nexus between the minimum wages and poverty.Indeed it does.
