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The minimum wage does not prevent zero salaries; instead it prevents workers and employers from agreeing to an $8 an hour salary. (John Cowie/iStockphoto)
The minimum wage does not prevent zero salaries; instead it prevents workers and employers from agreeing to an $8 an hour salary. (John Cowie/iStockphoto)

Minimum wage hikes: Benefits offset the costs Add to ...

In recent contributions to Economy Lab, Armine Yalnizyan and Mike Moffatt have debated the merits of a minimum wage increase as a way to stimulate the economy.

In fact, the best economic evidence seems to show that modest minimum-wage increases have very limited macroeconomic impacts in terms of overall growth and employment. They can, however, have positive impacts for both workers and their employers in low-wage sectors of the economy.

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The classical view is that increases in minimum wages raise the price of labour and thus result in less employment, either in the form of fewer jobs or in the form of reduced work hours.

As Republican Speaker of the House of Representatives John Boehner pithily put it in his immediate response to President Obama’s proposal to hike the U.S. federal minimum wage: “When you raise the price of employment, guess what happens? You get less of it.”

However, an exhaustive overview of the economic literature, by John Schmitt of the Center for Economic Policy and Research, finds that the great majority of literally dozens of recent studies in the United States conclude that the negative effects on employment of modest minimum-wage increases are extremely small. The results cluster very close to zero or just below zero, with some good studies showing small positive impacts.

Many commentators seem to think that even a small negative impact on employment is sufficient reason to rule out a minimum-wage increase.

An obvious response of employers to a higher minimum wage may indeed be to raise productivity (output per hour) – by doing more with less by cutting hours and jobs, or in a more positive way through investments in labour-saving equipment or training.

It is far from clear why higher productivity prompted by higher wages is a bad thing.

And it is worth underlining that even small negative impacts on employment arising from a minimum-wage increase will leave the great majority of minimum-wage workers better off. For example, someone working 30 hours per week for $10 per hour would be better off with a minimum wage of $11 per hour, even if his or her hours of work are cut by two per week (income of $308 per week versus $300 per week).

The more significant point made by Mr. Schmitt, based on several recent studies, is that higher minimum wages may correct for a significant tendency by low-wage employers to pay less than the hourly wage that actually serves their own best interests.

Many low-wage employers have job vacancies at any given time due to high worker turnover. But they are reluctant to raise wages to fill these vacancies since they would then have to pay more to all of their current work force. An equilibrium point may be to pay very low wages even if operations are not properly staffed at all times.

A higher minimum wage may help by reducing turnover. This reduces employer costs in three ways. Employers will not lose business due to not having enough workers on a shift; they will have more experienced and perhaps more committed employees; and they will save on recruitment and training costs, which can be quite significant even for low-skill jobs.

These benefits from a higher minimum wage can offset the cost of higher wages, which in any case do not put any single employer at a competitive disadvantage.

Mr. Schmitt concludes that lower worker turnover, and the resulting benefits to employers, may be the most important explanation why modest increases in the minimum wage have almost no effect on employment.

I eagerly await employers to join with workers in supporting a decent minimum wage, in the interests of both fairness and economic efficiency.

Andrew Jackson is Packer Professor of Social Justice at York University and Senior Policy Adviser to the Broadbent Institute.

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