The (Non) Impact of Minimum Wages on Poverty: Regression and Simulation Evidence for Canada

Abstract

We estimate the effect of minimum wages on poverty for Canada using data from the Survey of Labour and Income Dynamics (SLID) for 1997 to 2007 and find that minimum wages do not have a statistically significant effect on poverty and this finding is robust across a number of specifications. Our simulation results, based on the March 2008 Labour Force Survey (LFS), find that only about 30 % of the net earnings gain from minimum wage increases goes to the poor while about 70 % “spill over” into the hands of the non-poor. Furthermore, we find that job losses are disproportionately concentrated on the poor. Our results highlight that, political rhetoric not-withstanding, minimum wages are poorly targeted as an anti-poverty device and are at best an exceedingly blunt instrument for dealing with poverty.

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Notes

  1. 1.

    These sources are cited in Neumark and Wascher (2008, p. 141). Burkauser et al. (1996), Burkhauser and Finegan (1989), Card and Krueger (1995) and Sabia and Burkhauser (2008) also document and discuss the history and political support for minimum wages as an anti-poverty device in the US.

  2. 2.

    This weakening over time of the already weak relationship between low wages and poverty is documented and discussed, for example, in Burkhauser and Finegan (1989), Burkhauser et al. (1996), Burkhauser and Sabia (2004, 2007).

  3. 3.

    The poor targeting of minimum wages towards those in poverty in the US is documented and discussed, for example, in the studies mentioned in the previous footnote as well as in Freeman (1996), Gramlich (1976), Neumark and Wascher (2002, 2008), Smith and Vavrichek (1992) and Veeder and Gallaway (2001), and for Canada in Benjamin (1996, 2001), Campolieti and Gunderson (2010), Gunderson (2005), Mascella et al. (2009) and Sen et al. (2011).

  4. 4.

    This may be one of the reasons for the generally low level of political opposition to minimum wages. The adverse effects are likely to occur in the form of not getting a job or working fewer hours, and this is not likely to attract political attention as much as dismissals or layoffs.

  5. 5.

    Negative effects of minimum wages on training for the US are found in Grossberg and Sicilican (1999), Hashimoto (1982), Leighton and Mincer (1981) and Neumark and Wascher (2001), although Acemoglu and Pischke (2003) find no effect. For the UK, Arulampalam et al. (2004) also find no effect. For Canada, Baker (2005) generally finds a negative effect of minimum wages on training, but he states that no firm conclusion can be made because the results are not robust.

  6. 6.

    Summaries of the literature documenting high returns to education, especially for those who are otherwise likely to drop out and miss the substantial credential effects associated with completing key phases of education, are provided in Card (1999) and Gunderson and Oreopoulos (2010).

  7. 7.

    US evidence on the negative effects of minimum wages on education is found in Neumark and Wascher (1995a, b, 1996) and for some race-sex groups in Cunningham (1981) and for teens in low-income families in Ehrenberg and Marcus (1980, 1982) although that study found that it increased the education for white teenagers from high-income families. Card (1992), however, find no effect on enrolment and Mattila (1981) finds positive effects. For Canada, Campolieti et al. (2006) find no effect on enrolment.

  8. 8.

    Evidence on the more permanent scarring effects from initial bouts of unemployment is provided, for example, in Beaudry and Green (2000) and McDonald and Worswick (1999) and references cited therein.

  9. 9.

    US evidence that most minimum wage jobs are temporary stepping-stones is given, for example, in Carrington and Fallick (2001), Long (1999), Schiller (1994) and Smith and Vavrichek (1992). For Canada, Battle (2003) indicates that more than half of all minimum wage workers had been in their current job for less than one year, and only about 1 % of persons had been in their job for more than five years.

  10. 10.

    Evidence that minimum wage increases tend to lead to price increases is found in Card and Kruger (1995), MaCurdy and McIntyre (2001) and Wessels (1980) but not in Katz and Krueger (1992).

  11. 11.

    Studies using the method of regressing measures of poverty on minimum wages include Addison and Blackburn (1999), Burkhauser and Sabia (2007), Card and Krueger (1995), Neumark and Wascher (2002), Sabia and Burkhauser (2008, 2010) and Vedder and Gallaway (2001, 2002) for the US, and Sen et al. (2011) for Canada.

  12. 12.

    These poverty measures are discussed in Osberg (2000). More details of the calculation of LICOs are given in http://www.statcan.gc.ca/pub/75f0002m/2009002/s2-eng.htm.

  13. 13.

    Since our focus is on is on the impact of minimum wages on poverty holding constant other factors that can affect poverty, we do not incorporate information on transfer payments (e.g., unemployment insurance or welfare payments) that may be received by those who lose their job.

  14. 14.

    The recent Canadian evidence based on different data sets and methodologies includes Baker (2005), Baker et al. (1999), Campolieti et al. (2005a, b), Campolieti, et al. (2006) and Sen et al. (2011).

  15. 15.

    Simulation studies that focus on the net effect of minimum wage increases on poverty assuming no reduction in employment and hours include Burkhauser and Finegan (1989), Burkhauser et al. (1996), and Burkhauser and Sabia (2007) for the US, and Mascella et al. (2009) for Canada. Simulation studies that incorporate assumptions about employment and hours adjustments include Sabia and Burkhauser (2008, 2010) and Mincy (1990) for the US, Shannon and Beach (1995) for Canada and Leigh (2007) for Australia. Only Mincy (1990) reports reductions in poverty from minimum wages.

  16. 16.

    See http://www.statcan.gc.ca/pub/75f0002m/2009002/s3-eng.htm for the household adjustment for the LIM.

  17. 17.

    Results for after-tax measures are given subsequently in Table 2 for the key minimum wage impacts. Results for the control variables in Table 1 for after-tax measures (available on request) are very similar to those based on the before-tax measures.

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Correspondence to Byron Lee.

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Financial assistance from the Social Science and Humanities Research Council is gratefully acknowledged.

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Campolieti, M., Gunderson, M. & Lee, B. The (Non) Impact of Minimum Wages on Poverty: Regression and Simulation Evidence for Canada. J Labor Res 33, 287–302 (2012). https://doi.org/10.1007/s12122-012-9139-8

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Keywords

  • Minimum wages
  • Poverty
  • Canada

JEL Classification

  • J30
  • J38
  • J80
  • J13