Does hike in minimum wage cut poverty? Findings say no

TheGlobeandMail.com – RoB/economy/economy-lab
Posted on Friday, March 18, 2011.   Stephen Gordon

The British Columbia government’s decision to increase its minimum wage to $10.25 an hour from $8 – an increase of more than 25 per cent – by May 1, 2012 is apparently based on its government’s stated desire to help lower-income families.

The NDP opposition’s position is that the measure is long overdue, and is only a “first step” towards reducing poverty.

These are noble sentiments, but if the B.C. Liberals and the B.C. NDP believe that the minimum will help reduce poverty and inequality, then they are likely to be disappointed.

Discussions about the effects of increasing the minimum wage are usually dominated by its possible effects on employment. But an unspoken assumption underlying the debate is that increasing the minimum wage does in fact reduce poverty.

This assumption turns out to be at odds with the evidence.

Proponents of increasing the minimum wage speak often of the low-income families who would benefit.

But two recent empirical studies – one for Ontario, another for Quebec – show that the intersection between those who earn minimum wage and those who are in low-income households is surprisingly small.

The rate of poverty among minimum wages earners is roughly the same as the poverty rate in the general population. Even if you set aside the employment effects, increasing the minimum wage would have the same effect on poverty as distributing money at random. Some people in low-income households will benefit, but that will be more a matter of random chance than of policy design.

To my knowledge, there is only one Canadian study that attempts to measure the link between the minimum wage and poverty, and its findings may surprise politicians in B.C. and elsewhere: “a 10-per-cent rise in the minimum wage is … significantly associated with a 4-per-cent to 6-per-cent increase in the percentage of families living under Low Income Cut Offs (LICOs).”

This is only one study, and future investigations may obtain different results. But if we want to make policy based on available evidence, then we should be very wary about using an increase in the minimum wage as a way of reducing poverty.

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