Executive Summary¹

Most economists would likely agree that high minimum wages reduce employment opportunities for young and unskilled workers. Most would probably also agree that high minimum wages do not necessarily raise the incomes of the poorest members of society. Yet, in spite of this consensus about the economics of minimum wages, the minimum wage continues to be touted by politicians and policy-makers as an effective way to help the poor.² This is puzzling, since the adverse economic impacts of the minimum wage have been extensively documented.³

This Public Policy Source provides a review of the economics of minimum wage laws and, in particular, of the empirical literature on some of the economic impacts of minimum wage laws. It also provides an overview of the Canadian data on who earns the minimum wage. By examining the incidence of the minimum wage, it is possible to determine whether the minimum wage is likely to achieve its official objective of raising the incomes of the poor. Some of the highlights of this study are as follows.

1. Increases in the minimum wage are likely to reduce employment opportunities for young and unskilled workers. Most empirical studies estimate that a 10 percent increase in the minimum wage reduces the rate of employment among youth (ages 15-25) by 1 to 3 percent. A 10 percent increase in the minimum wage appears to reduce employment rates of teenagers by 2 to 4 percent. Hence, it is largely the young who feel the adverse effects of minimum wage, since they are among the least skilled members of the labour force.

2. Increases in the minimum wage have other adverse economic impacts. Empirical studies show that when minimum wages rise, employers offer fewer fringe benefits and reduce on-the-job training. Furthermore, high minimum wage rates are associated with higher school dropout rates, as the increase in the minimum wage induces teenage workers to leave school in search of employment. Because jobs are scarcer when minimum wages rise, the ultimate result of a high minimum wage policy is a larger proportion of idle youth—youths who are neither in school nor employed.

3. Most minimum-wage workers are low-skilled workers. In 1995, over 35 percent of all minimum-wage workers were high-school dropouts. Less than 7 percent of minimum-wage workers had a university degree. This is not surprising, since poorly educated workers are generally poorly paid. It is a well-established empirical fact that earnings increase with education and skill level.

4. Most minimum-wage workers are young. Seventy percent of men working at minimum wage are between 16 and 23 years old. Seventy-eight percent of these young minimum-wage workers live at home with their parents. Over 55 percent of women working at minimum wage fall between 16 and 23 years of age. Of these young minimum-wage workers, over 60 percent live at home. Hence, the “typical” minimum-wage worker is a young person living at home with his or her parents.

5. International evidence shows that most low-paid workers are not in low-income families. Hence, increases in the minimum wage are unlikely to “trickle down” to low-income households. The benefits of higher minimum wages accrue largely to teenagers and young workers living in relatively affluent households. Furthermore, to the extent that higher minimum wages raise the price of goods that poorer families tend to consume, increases in the minimum wage have perverse impacts on the distribution of real incomes across households.

Hence, the consensus among economists about the impacts of the minimum wage and its efficacy in raising the incomes of the poor remain: higher minimum wages are unlikely to raise the incomes of the poor. Rather, they are likely to reduce employment opportunities for the unskilled and raise the incomes of certain low-wage workers who do not necessarily come from low-income families.