Minimum Wage To $16.25? Yeah Nah

One of Labour’s proposed policies, in the unlikely event they are able to form a government after the election, is to raise the minimum wage by $2 an hour to $16.25 an hour.

  1. The literature on the minimum wage is all over the place. It’s not as simple as a supply and demand story. A major reason is things like working for families. But there are many people who would lose jobs or shifts.
  2. There are long term social mobility implications – poor kids will have a higher opportunity cost of obtaining higher qualifications if they can find a job at that rate. So the very people you want to gain higher qualifications have to have very high future-time orientation to turn down $16.25 an hour for a student allowance.
  3. Hours actually worked matter – not all minimum wage earners work 40 hours a week. So the impact on “Hard Working Small Business Owners” is a lot less than some would have you believe. In fact, if a modest rise in the minimum wage affects your bottom line so badly, you should probably give up.
  4. The minimum wage is already in excess of 50% of the 2013 median hourly wage of $21.58 – making the minimum wage 75% of median hourly earnings is very high indeed. At $14.25 the minimum wage is already above 50% of the median hourly earnings at 66% so it’s likely there are already negative employment effects at play.

Just some quick thoughts. To achieve the objectives minimum wage / living wage proponents want to achieve – raising the incomes of the bottom quintile – could be far better achieved through a basic income or expansion of the independent earner tax credit.

If you’re looking for a more detailed overview of minimum wage literature including a lot of stuff on the youth minimum wage, check out the minimum wages tag at Eric Crampton’s blog.

Edit: clarified that minimum wage is already over 50% of median hourly wage of $21.58 in 2013

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