Minimum wage is a job killer

The National Post has published two opinion pieces by economists with opposing views on the minimum wage. Niels Veldhuis and Amela Karabegovic from the Fraser Institute make the case against the minimum wage and Jim Stanford who is with the Canadian Auto Workers union is for minimum wages. It may not surprise people much to learn that I side with the Fraser Institute but truly I feel that they made the better case.

For much of his op-ed Mr. Stanford denied the empirical evidence that increased minimum wages costs jobs. This is what the Fraser Institute economists wrote on that issue:

The single largest problem with minimum wage increases is that they result in job losses, because they increase labour costs for employers who respond by reducing the number of employees and/or the number of hours they work.

Consider the voluminous academic research on the subject. A recent study by renowned minimum-wage experts Professor David Neumark, of the University of California, and Dr. William Wascher, a U.S. Federal Reserve Board economist, comprehensively reviewed all of the academic studies on minimum wages over the past 15 years. In total, they reviewed more than 100 studies covering 20 countries and found that the “overwhelming majority” consistently show that minimum wage increases have negative employment effects.

The empirical evidence from Canada shows much of the same. At least 14 academic studies have examined the impact of minimum wage increases in Canadian provinces. Based on these studies, a 10% increase in the minimum wage is likely to decrease employment by an average of three to six percent for young workers (aged 15 to 24). For young workers most directly affected — those earning between the current minimum wage and the proposed higher wage — the impact is more acute, with employment losses of up to 20%.

Of course, like any academic research, there is hardly unanimous agreement. Mr. Stanford claims that, despite most studies showing the opposite, a “new spate of research” has produced evidence that minimum wage does not hurt employment. To demonstrate the existence of this “spate,” Mr. Standford references the work of David Card and Alan Kruger.

I assume that Mr. Stanford is primarily referring to their book, Myth and Measurement: The New Economics of the Minimum Wage. If so he should be cautious in relying on their study for empirical evidence. There are serious problems with the data that was collected for that book:

The Pennsylvania-New Jersey data were collected in two waves of telephone interviews, one before the minimum-wage increase (in February) and one after (in November). There are serious questions concerning the accuracy of that information. Studies using the official payroll records of fast-food firms in the relevant geographic areas had significantly different results and reached opposite conclusions. The major challenge has come from the Employment Policies Institute (EPI), which issued a report titled, "New Evidence on the Minimum Wage: The Crippling Flaws in the New Jersey Fast Food Study,'' in April 1995. EPI made its data available to David Neumark and William Wascher. They found that the employment effects of the New Jersey minimum-wage increase were negative and quite consistent with the prevailing wisdom.

In the case of the payroll data, employers and the tax-collecting agency have strong financial incentives to ensure that the total dollar volume of payrolls is accurately stated. There is no such incentive for accuracy in the telephone surveys. Thus, there is a strong presumption of correctness in favor of the payroll data. We would urge the disputants in this issue to attempt to reconcile the two databases, perhaps by making them available in sufficient detail to enable some neutral third party, sworn to confidentiality, to exactly match the data, record the aggregate totals, and then destroy the individual firm information. Until the questions concerning the Card-Krueger data are resolved, their natural experiment analysis must remain suspect.

At the very least the evidence that Mr. Stanford presented is highly suspect. It certainly isn’t enough to challenge the “overwhelming majority” of studies that show a negative impact on employment.

The logic that Mr. Stanford used to make his argument is also suspect:

No employer hires labour just for the sake of growing their workforce. So the fact that labour is cheaper, in and of itself, never guarantees that more people will be hired.

Absolutely true, but rather irrelevant. No one is claiming that a supply of cheap labour is all you need to have economic activity. If that was true African countries would be brimming with economic output. You also need something to produce and someone willing to invest resources into producing it. This is a point that Mr. Stanford comes tantalizingly close to realizing, but still he misses the crucial element.

Why do employers hire workers? To work: that is, to produce something. Employment is a derived demand, dependent on sales of whatever good or service workers produce. Their employment depends mostly on whether there’s enough demand for their output, so that their employers can profitably produce it.

The key words are right there and he misses it. In case you missed it too, the key words are “profitably produce it.” That is to say that if someone is going to invest money they want to see a profit. The greater the likely profit they will get the more they will invest. Inflated wages means that profit will go down and thus investment will decrease. In terms of employment this means fewer jobs created.

That is not just the common wisdom among economists; it is what the empirical data is showing us. So I am sorry Mr. Stanford but I remain unconvinced. Minimum wages is a job killer.