Part 3: Policy Implications: The Minimum Wage
as a Redistributive Tool

Traditionally, economists have opposed the use of legally sanctioned minimum wages as an instrument for redistributing income on grounds that it is a relatively inefficient way to redirect resources to those in need. According to the standard argument, workers earning minimum wage are young and unskilled but not necessarily poor. The empirical evidence presented above strongly supports the view that increases in the minimum wage reduce employment opportunities for these groups and transfer very little income to the poor. In the past, most economists have argued that a far better way to transfer income to the needy would be through direct cash subsidies via the tax system rather than by imposing a price floor that may distort the workings of the labour market.

Recently, however, this consensus about the economic effects of minimum wages and about the desirability of an increase in minimum wages has come under attack. As we saw, David Card and Alan Krueger (1995) present evidence purporting to show that increases in the minimum wage in the United States have not resulted in significant employment losses and that increases in the minimum wage have, in some cases, increased employment. In light of this evidence, many analysts have expressed renewed interest in the potential for the minimum wage to become a viable redistributive instrument (see, for instance, Freeman 1995). Indeed, recent increases in the American federal minimum wage were partly justified on the weight of evidence provided by Card and Krueger.

I have already discussed the problems with Card and Kreuger’s findings. To advance the discussion, I want to evaluate, on the basis of our evidence about who works at minimum wage, the proposition that increases in the minimum wage would successfully redistribute income to those most in need. To facilitate this discussion, I assume that increases in the minimum wage will produce no unemployment. This will enable us to discern the likely effects upon income distribution of an increase in the minimum wage under a “best case” scenario.

As noted earlier, the largest portion of low waged workers is made up of young people between the ages of 16 and 24 who live at home with their parents. While the household income of these individuals is not available, it does seem fair to infer that most of these individuals do not rely on income from their own labour as their primary source of support. Given that these individuals live at home, they are most likely dependents and, hence, are not in need. Indeed, the data suggests that relatively few low waged workers are from those groups that fall under the general rubric “needy.” A very small percentage of men working for low wages are drawn from those who live alone or who are the single supporter of children. While female workers of varying ages are fairly well represented among low-wage workers, very few live alone or are single supporters of children. The main beneficiaries of a minimum wage increase are therefore not those most in need of a pay increase.

In fact, the international evidence supports the view that “relatively few low-paid workers live in low-income households, and relatively few low-income households have low-paid workers” (The Economist 1998: 80). Even if a minimum wage has no disemployment effects, it will be effective in reducing poverty only if a large portion of poor families have poorly paid workers. According to the OECD (1998), most poorly paid workers have well-paid partners or affluent parents. For instance, in America only 33 percent of those who earn less than two-thirds the median wage live in families with incomes less than half the national median. In the United Kingdom, only 10 percent of those working for low wages are in low-income households. In Ireland, this figure is a mere 3 percent. Hence, OECD researchers conclude that minimum wages have almost no effect when it comes to reducing inequality and poverty among households.¹³

Indeed, an increase in the minimum wage could potentially have a perverse effect on the distribution of income across households. Even under the assumption that an increase in the minimum wage does not increase unemployment, most of the pay increase resulting from such a policy would in fact accrue to younger workers living at home. Given that these individuals have access to resources above and beyond their labour income (since they may be partly supported by their parents), the effect of a minimum wage increase is to transfer resources to those who are relatively well off. Additionally, to the extent that the hike in the minimum wage raises the prices of goods that are consumed by the less wealthy, a minimum wage increase will make the needy even worse off. Table 2 reveals that a large proportion of workers earning minimum wage is employed in the service and sales sectors (e.g., jobs in the retail, food and beverage, accommodation, and personal services industries). Consumption expenditures of lower income individuals are focused on many of these industries. Hence, if an increase in the minimum wage raises the prices of the goods produced by these industries, then the real incomes of the needy may even decline. This point is made most emphatically by economist Donald Deere:

To add insult to injury for low-income families, the minimum wage increases the cost of the goods and services produced with low-wage labor—goods and services that are purchased disproportionately by low-income families. Almost one-half of all low-wage workers are employed in the retail sector, which means, for example, that part of what an increase in the minimum wage does is take money from the pockets of the people in front of the McDonald’s counter to put in the pockets of the people behind the McDonald’s counter. (Deere 1998: 2-3)

Thus, there are reasons to be skeptical about the claim that a minimum wage increase can be used as an efficient instrument of redistribution to those who are less well off, even under the generous assumption that there are no disemployment effects resulting from the minimum wage hike. The typical minimum wage worker in Canada is young and lives at home. Older workers earning minimum wage are generally not the only income earners in their households. Nor do they tend to have dependents. The minimum wage is therefore a very blunt and ineffective instrument for redistributing income to the needy.¹⁴ Indeed, increases in the minimum wage could leave the poor even worse off if the effect of the minimum wage increase is to raise the real prices of goods that the poor consume. In this scenario, the effect of an increase in the minimum wage on the distribution of income is very regressive.

Fortin and Lemieux (1997) examine the redistributive impacts of minimum wages in Canada. They find that the minimum wage has a significant impact on the shape of the bottom end of the income distribution. As part of their study, Fortin and Lemieux also compare the redistributive impact of the minimum wage relative to other government transfer programs and find that the minimum wage constitutes a relatively small “transfer program”: total earnings at minimum wage are equivalent to only one-third of total social assistance payments and one-fifth of total unemployment insurance payments. Fortin and Lemieux therefore conclude that “the redistributive impact of the minimum wage is modest relative to other transfer programs” (1997: 25). Hence, the overall sense one takes from their study is that the minimum wage affects the distribution of income in a desirable way but only modestly. Fortin and Lemieux conjecture that the relative importance of the minimum wage (as a “transfer program”) may increase in years to come as the size of other government transfer programs decreases.

In my opinion, the conclusions of Fortin and Lemieux are uncertain at best. Their results do not incorporate the potential effects of the minimum wage upon output prices and so the net effects of an increase in the minimum wage upon the real incomes of those who are less well off are uncertain. Furthermore, even if the minimum wage increase does redistribute income in the desired direction, Fortin and Lemieux have not established that this would be the most efficient way of doing so. Given that an increase in the minimum wage is likely to have some negative employment effects, an increase in the minimum wage may be a very expensive way to achieve a “modest” improvement in the distribution of income, particularly since a large portion of the increase in earnings due to a minimum wage will be directed to young workers who live at home. Hence, the desirability of using the minimum wage as an instrument for redistribution remains questionable at best.