It’s a plan that may have little chance of passing a divided Congress and would have a limited impact on the U.S. economy, but President Barack Obama’s proposal to raise his country’s minimum wage to $9 (U.S.) from $7.25 has reignited a debate that has divided economists for decades.
Mr. Obama characterized the plan, unveiled in Tuesday’s State of the Union address, as a way to ensure that 15 million American workers make a living wage. “If you work full time, you shouldn’t be in poverty,” he said Wednesday at an auto parts plant in North Carolina owned by Canadian firm Linamar Corp.
Those on the right, however, immediately raised the counter argument that higher minimum wages will lead to fewer jobs. House of Representatives Speaker John Boehner told reporters that “when you raise the price of employment, guess what happens? You get less of it.”
The wage debate raged on as the U.S. National Federation of Independent Business said the move could be a job killer, while the Economic Policy Institute, a liberal think tank, said the proposed wage increase will benefit 21 million workers and boost wages by $22-billion by 2015.
However, the odds of this proposal actually being approved by a divided Congress are “between slim and none, and heavily weighted against none,” said Ken Goldstein, economist at the New York-based Conference Board, who thinks more pressing economic priorities should be debt and austerity, immigration and health care.
Even if the proposal were to be approved, its impact would be minimal because it would affect just a fraction of the U.S. labour market, he noted; only a small percentage earn minimum wage and some services sectors would be exempt from hikes.
Gary Burtless, an economist at the Washington-based Brookings Institution, said the proposal could gain traction because U.S. opinion polls show consistent enthusiasm for wage hikes for the country’s lowest wage earners. He favours increases to the minimum wage, saying they would support low earners without wreaking undue havoc on employment or inflation. But he is concerned about the timing of such a move, given the fragility of the economy and that some employers are already bracing for higher health-care-related costs stemming from new legislation.
There is a wide range of research that supports both those for and against minimum wage increases. Those in favour often cite a study from New Jersey in the mid-1990s, after that state raised its minimum wage from $4.25 to $5.05. The study found no drop in employment after the wage boost.
But there are also other studies, including some in Canada, that suggest employers cut workers, hours, or benefits when the minimum wage rises. Some also argue that raising the minimum wage benefits mainly young people who live at home, or those working part time to supplement other family members’ incomes.
“There are tremendous and very well done academic studies … on both sides of the issue,” said Finn Poschmann, vice-president of research at the C.D. Howe Institute in Toronto.
Canadian Auto Workers economist Jim Stanford said he feels Mr. Obama’s proposal, if implemented, will unquestionably be economically beneficial, because putting more money in the pockets of low wage earners will help boost demand for goods.
“Sensible, modest increases in minimum wages have virtually no impact on employment levels,” he said. Dramatic increases would hurt employment, he acknowledged, but “that’s not what any one suggests.”
There is room for improvement in Canadian minimum wages, which range from $9.50 in Saskatchewan to $11 in Nunavut, “in line with productivity growth and a growing economy,” Mr. Stanford said. He noted that in Ontario alone, the minimum wage has been frozen for the past three years. Unlike the United States, Canada has no federal minimum wage.
In some other countries, minimum wages are dramatically higher than those in North America, with little apparent impact on employment levels. In Australia, for example, the minimum wage is about $16 an hour, while the unemployment rate sits at 5.4 per cent. The reason for that, Mr. Poschmann said, is that the booming economy in Australia makes the minimum wage essentially unnecessary.
“Australia has been … riding a commodity price boom the way that Western Canada has. That means that demand for labour, particularly in the resource sector, is so high that a large minimum wage is entirely irrelevant to matching up employers and employees,” he said.
Because of the healthy economy, entry-level employees can earn far more than the minimum wage, he said. That’s also the situation in Fort McMurray, Alta., where the lowliest of workers are paid well above the province’s minimum wage of $9.75.Report Typo/Error
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