Unemployment and the Minimum Wage

Every so often, there is an article in a newspaper somewhere that says that the minimum wage has to increase. The most often given reason is that people just can't afford to live on such  low wage. This time around, the article is in the Vancouver Sun and the argument is being put forth by the B.C. Federation of Labour and supported by the BC Restaurant and Food Services Association. (Click here for article).

As anyone that has taken first year microeconomics can tell you, if you set a minimum wage rate above the equilibrium wage, the only guaranteed result is unemployment. Now, some may call me cynical, but I have never understood how making someone unemployed can make them better off. Logic says that if unemployment was better than working, we'd all quit.

The following table illustrates the unemployment rate of 15-24 year olds (excluding students) as reported in the Statistics Canada Labour Force Survey (LFS Table 9-2) and the minimum wages as published in the Vancouver Sun article.

The correlation between the two is close to 0.5 which matches what theory suggests; an increase in minimum wages increases youth unemployment. I admit the analysis is not overly technical, but anyone that wishes to can find similar results in the economic literature. This is not a new concept. In an article published in 1927, Arthur Pigou stated quite clearly that any policy that raised wages above equilibrium would cause unemployment. (Wage Policy and Unemployment, The Economic Journal, Vol 37, No 147 Sep 1927 pp 355-368)

Why then would the BC Fed and the Food Services Union want an increase in minimum wages? Quite simply it puts upward pressure on their wages. If a union can bargain for a wage that is $3 above the minimum, then their workers also get a $2 increase if the minimum wage rises by $2.

The issue is not whether or not the minimum wage 'should' be increased. That is for politicians to decide. The issue we face as economists is what 'will' happen if the minimum wage does increase. If you're a low wage worker trying to get through school and reading this ... you are the one that will be affected.