How not to solve poverty

Raising the minimum wage may look generous, but whom does it benefit really?
Rebekah Hebbert | 28 April 2011
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And was Jerusalem builded here
Among those dark satanic mills?

I will not cease from mental fight,
Nor shall my sword sleep in my hand,
Till we have built Jerusalem
In England's green and pleasant land.


(“Jerusalem”, by William Blake)

Last month marked the 100th anniversary of the most deadly industrial accident in America. Trapped in the burning Triangle Shirtwaist Factory, 146 people, mostly young immigrant women, died. They were victims not of fire, but of neglect, avarice, doors which were locked to prevent them from going home early or stealing needles, a foreman who ran away with the key. But the flames of the factory, the bodies falling to the ground as they leapt to their deaths from the eighth and tenth floors, changed something, changed many things. It became a never again moment, from which generations of labor reform laws have sprung.

A century later, men and women are still fighting to shut down “those dark satanic mills”, as less than deadly industries such as call centres are now referred to by some activists. But, while paying respectful homage to many of these advocates and laws which have really done good, we are compelled to ask other, more difficult questions. Are we going too far? Can we really build Jerusalem (paradise) in our world? What are the unintended consequences of our actions? Is there a time when the warrior must look at a battle half won, and hang up his sword for fear that the collateral damage of finishing would be too high?

When do laws stop helping, and start hurting?

An interesting illustration of this may be seen in Canada, where the government of British Columbia is raising the minimum wage from $8 per hour to $10.25 per hour.

“Raising the minimum wage and eliminating the training wage is a fair and reasonable step forward in putting families first and building our economy. This increase could mean more than $4,000 additional dollars annually for a full-time employee, providing more support to BC workers and the families who depend on them,” said Premier Christy Clark.

Premier Clark’s goals are laudable. Who doesn’t want to put families first and make sure that full-time employees get a living wage to support their dependents? But whether her statement reflects the reality of life in the province, and whether raising the minimum wage will help those who need it most is open to question.

Ms Clark’s statement implies that people making minimum wage are likely to have families, and to be on low incomes. In reality, 80 per cent of minimum wage workers do not live in low income households; rather, they are the children or spouses of higher-income earners. Only 1.6 per cent of men over the age of 25 earn the minimum wage, with that number climbing to 3 per cent for women. These numbers are likely to be even lower in BC, where in 2008 only 2.7 per cent of the entire population was working for minimum wage, compared to the national average of 5.2 per cent. The average hourly wage in BC is $23.16.

These statistics suggest that an increase in the minimum wage is unlikely to directly benefit many “BC workers”, much less the “families who depend on them”. The argument can and has been made that raising the minimum wage would indirectly affect workers in higher wage brackets by a “ripple effect” that forces their wages up. Even without the proposed boost, however, BC’s average hourly salary has increased $5.18 in the last ten years. In any case the ripple effect needs to be balanced against many other issues.

For one thing, such a move would have a negative effect on some businesses, especially small businesses and those that tend to employ youth, by raising their payrolls, and this would potentially force them out of business. Also, if the additional costs are merely passed on to consumers, inflation would erode the “higher wage” of workers. One does not need to be an economist to understand that, while the government could set the minimum wage at any level they pleased, even $100 per hour, unless accompanied by a rise in productivity this would only cause inflation, until the workers were making the same amount of money, in real or inflation adjusted terms, as they were before (although an economist could explain it to you with some rather fascinating little graphs and formulas, if you like that sort of thing).

Negative effects on businesses and consumer purchasing power aside, is there any other, perhaps more compelling, reason not to raise the minimum wage?

A study released last year from the University of Waterloo surveyed changes in minimum wages in Canada, and arrived at the somewhat startling conclusion that a 10 per cent increase in the minimum wage is associated with a 4 - 6 per cent increase in families living below the low income cut-off line. In other words, all other things being equal, an increase in the minimum wage leads to an increase in the number of families living in poverty.

Why does this happen if few minimum wage earners live in poverty anyway? It happens because young people are disproportionally likely to be contributing to the family income in low-income families (in many situations, they may be the parent(s) and primary breadwinners in a low-income family) and increasing the minimum wage can have a strong effect on teen employment. The Waterloo study found that an increase of 10 per cent in the minimum wage was associated with a 3 - 5 per cent rise in teen unemployment. It is quite intuitive really, the first people to lose their jobs when a wage increase is mandated are those who were most marginally employed in the first place. While it may be worthwhile to hire a teenager at eight dollars an hour, at over ten dollars an hour they can be a liability, rather than an asset.

Can we really, then, justify a program that hurts businesses, increases the poverty rate, and robs young people of one of the most valuable assets they can acquire, work experience? Particularly, can we justify it in the name of helping families and workers?

The law of unintended consequences is one of the most unforgiving in economics, and in real life. While raising the minimum wage sounds like an obviously helpful and “fair” plan, when other, potentially less harmful options exist to help lower-income families we must ask ourselves, what price this “Jerusalem”? What price the “rights of workers”, if the children of single mothers slip further into poverty, while middle-class teenagers working at McDonald’s earn more pocket money?

When do reformers stop helping, and start victimizing the very people they wanted to save?

Rebekah Hebbert lives in Ontario, Canada, and is studying economics.

This article is published by Rebekah Hebbert and MercatorNet.com under a Creative Commons licence. You may republish it or translate it free of charge with attribution for non-commercial purposes following these guidelines. If you teach at a university we ask that your department make a donation. Commercial media must contact us for permission and fees. Some articles on this site are published under different terms.

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