The problem with minimum wages

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Today marks the 10th anniversary of the introduction of the national minimum wage in the UK – something the government trumpets as one of their proudest achievements. 

Minimum wages are one of those things that sound wonderful in theory, and which politicians are therefore unwilling to publicly oppose. But as with all government attempts to fix prices (in this case, the price of labour), minimum wages tend to have some unfortunate unintended consequences – as this Fraser Forum article succinctly points out.

  • A review of 90 studies in fifteen countries carried out by Professor David Neumark of the University of California and Dr. William Wascher, a U.S. Federal Reserve Board economist, found that "the overwhelming majority" of studies consistently showed that minimum wage increases resulted in decreases in employment.
  • Research by Professor Morley Gunderson of the University of Toronto found that a 25 percent minimum wage increase (which was being proposed by the Ontario government at the time) would reduce employment by as much as 15 percent – even if phased in slowly.
  • Employers often respond to minimum wage rises by reducing on-the-job benefits and training – not good news in an increasingly skills driven economy.
  • Raising the minimum wage has also been associated with higher drop-out rates in schools.
  • The beneficiaries of minimum wage rises do not tend to be low-income workers and struggling families In fact the only people made better off by minimum wage increases are young people living at home and adults supplementing their family income with part-time work.

Let's hope further minimum wage rises – or, indeed, the abolition of the lower minimum wage for young people – are not on the government's agenda. The costs would almost certainly outweigh the benefits.