Options like cutting red tape and fostering startups is more effective
Alberta recently became the Canadian province with the highest minimum wage, set at $12.20 an hour. This is part of the NDP government’s push to increase the province’s minimum wage to $15 an hour by 2018. This has sparked plenty of discussion on whether Ontario should follow suit and raise its minimum wage to $15 an hour, up from the current $11.40 an hour.
This conversation isn’t just happening in Canada. Last year, then Chancellor of the Exchequer George Osbourne announced plans for a “living wage” of £9 an hour, roughly $15 Canadian, as part of the British government’s plan to tackle poverty.
In the U.S., senator Bernie Sanders pledged to increase the minimum wage to $15 an hour as part of his campaign for the Democrat nomination, and Hillary Clinton has since said she’ll raise it to $12 an hour.
Campaign promises aside, there are plenty of good reasons for wanting to raise the minimum wage.
People should be able to earn a living through their work, and big companies often undervalue their employees while making enormous profits. Increasing the minimum will also tend to put more money in the hands of poorer workers, allowing them to better contribute to the economy.
However, there are also good reasons not to raise the minimum wage. Raising the minimum wage does tend to lead to price hikes as it increases the cost of labour and the cost of productivity.
This could also lead to a loss of jobs, as businesses will be forced to lower employment to compensate. Small businesses will suffer the most from a minimum wage increase, as those businesses need every cent they can spare. There is also little evidence to suggest that increasing the minimum wage is the most effective way of bolstering the economy.
None of the Nordic countries, despite being often touted as beacons of social democracy, have a minimum wage except for Estonia, where it is less than €3 an hour. In those countries, wages are determined with collective bargaining between the employee and the employer.
In the end, there just isn’t enough reason to support large increases in the minimum wage. Should there be a minimum wage? Yes. A reasonably high minimum wage? Also yes. But $15 an hour? No.
Part of the beauty of the free market is that when employees and employers meet on equal terms, they will generally cooperate, and both walk out of the room better off.
The problem is that they don’t often meet on equal terms, something that can’t be solved by politicians storming into the room and dictating terms.
However, it could be resolved by encouraging opportunity and innovation, with actions such as cutting red tape for small businesses and startups, as well as more education funding to enable lower tuition. Maybe governments could take a crack at adopting guaranteed minimum income to replace the welfare state.
The ideas behind a $15 minimum wage are important, but after weighing all the evidence, there are more efficient and less risky ways to keep people out of poverty.