Steep increases to the minimum wage have a high likelihood of leading to more unemployed immigrants as well as more poverty.
Ontario’s proposed 20.6-per-cent increase in the minimum wage from $11.60 in October to $14 on January 2018 is the largest dollar hike in any Canadian province over the past two decades. By Jan. 1, 2019, the minimum wage is scheduled to reach $15. Poverty advocates argue many low-income households will benefit. But they should also take a close look at the Canadian evidence that shows that minimum-wage hikes will lead to fewer jobs for immigrants.
Much of the current Ontario debate has focused on either U.S.-based research or the experience in some specific cities. Ontario Labour Minister Kevin Flynn said that wage increases in San Francisco and Seattle led to increasing employment in those areas. The most recent data out of Seattle released this week, however, now show that take-home pay for minimum-wage workers has begun to fall, with their hours apparently being cut as the minimum wage continues to move even higher towards that city’s planned US$15 target.
A substantial number of Canadian studies contradict the claims that higher wages lead to more employment. One robust finding that emerges is that minimum-wage hikes result in lower employment for teens. This is of concern as entry-level jobs help young people develop time-management skills in balancing school and work and help them gain valuable professional experience.
In a research paper I co-authored with Kathleen Rybczynski that will soon be published in the journal Contemporary Economic Policy, we found that a higher minimum wage may possibly be linked to employment reductions among another key vulnerable demographic ignored by previous studies. Based on 185 minimum-wage hikes implemented by Canadian provinces from 1981–2011, we find that increasing minimum wages led to a reduction in employment rates of not just teenagers, but also immigrants. Specifically, a 10-per-cent increase in the minimum wage can be linked to an approximately two-per-cent decline in employment rates of immigrants aged 25 to 54 years old.
From one perspective, this result should not be surprising: Roughly 19 per cent of immigrants are minimum-wage employees. Why might a minimum-wage hike hurt immigrants most? If businesses are hiring less, with no change in the supply of available workers, then they may prefer Canadian-born applicants whose experience and qualifications are more easily relatable to Canadian business owners. Whatever the reason, the presence of negative employment impacts on immigrants should be of significant policy concern, especially given the well-documented problems of labour-market assimilation that new immigrants face.
Adverse minimum-wage effects are not restricted to immigrants. An earlier study I co-authored was the first to investigate minimum-wage impacts with respect to the percentage of families falling below Statistics Canada’s Low Income Cut Off, an unofficial but common measure for poverty. We found that a higher minimum wage paradoxically resulted in an increase in the percentage of low-income households, possibly generated by family members losing their jobs as a result of employers responding to higher minimum wages.
The minimum wage has an important role in society. Minimum levels of compensation for work should not be determined by market forces and should be set by the government. But the minimum wage — effectively mandating a cash transfer from business to workers — should not be the chief mechanism for keeping people out of poverty. Better-targeted policies can be put in place to improve the living standards of struggling workers. For example, government policy should be framed to assist minimum-wage workers to obtain further education and acquire new skills, enabling them to find new and rewarding careers.
Steep increases to the minimum wage have a high likelihood of leading to more unemployed immigrants as well as more poverty. And these findings are based on much smaller minimum-wage hikes relative to what Ontario is about to embark upon. Ontario should think again about pushing ahead with steep minimum-wage increases or at least consider a more gradual phase-in.
Anindya Sen is a research fellow at the C.D. Howe Institute and professor of economics and director of the Master of Public Service program at the University of Waterloo.
Published in the Financial Post