When the last Ontario Budget came down, and included a continued freeze of the base minimum wage at $10.25 per hour. This has angered poverty activists, and no doubt pleased the business lobby. Now the government has launched another committee to study the minimum wage, appointing my colleague in the academy, Anil Verma to chair it.
I like to show two clips in class when I discuss the mininum wage.
The first is of Milton Friedman, godfather of the law and economics school, arguing that the minimum wage has no benefits whatsoever, and in fact makes everyone worse off, even the people who receive it. It’s a dated clip, but the arguments made by the anti-minimum wage folks is exactly the same today as it was in the 1960s.
Friedman deploys here what Albert Hirschman called the “Perversity Thesis” in his fantastic book called The Rhetoric of Reaction. Hirschman argues that reactionary arguments for over 200 years have followed the same line of reasoning. The Perversity Thesis posits that any attempt to improve social or economic life will actually produce the opposite result from what is intended. Hence, Friedman’s claim is that trying to help the poor by introducing a minimum wage will actually make the poor worse off.
The Friedman claim that the effects of the minimum wage are wholly negative is hotly disputed, and not supported by empirical evidence. The true story is much more nuanced. Most researchers believe that the minimum wage does have a small negative effect on employment of young people. However, there can be no dispute that the minimum wage does put more money in the hands of some people, and that extra income stimulates spending, which has positive economic effects. The question is whether the ‘negative’ effects outweigh the ‘positive’ effects. Economists won’t ever agree on this.
In practice, the effect of minimum wages on employment is probably a wash. Gradual increases in minimum wages, within reasonable bounds, have virtually no impact on employment at all, in either direction. So long as levels are set realistically relative to productivity and profitability, minimum wages can be increased with no measurable damage to employment.
The second clip is of Senator Ted Kennedy in the U.S. Senate advocating for a small raise in the mininum wage. He obviously doesn’t buy Friedman’s argument.