WHY RAISING MINIMUM WAGE RATES ISN’T NECESSARILY THE BEST APPROACH IN COMBATING POVERTY AND CREATING PROSPERITY
Recent years have seen a great deal of discussion around the theme and perception of increased income inequality in Canada and elsewhere. Governments at all levels in Canada and in other countries are grappling with issues surrounding wealth distribution across income levels and generations.
It is not a debate easily boiled down to talking points. Policies employed to smooth out the distribution of wealth across a population are as complex as they are passion-inducing.
Specifically, there has been much debate about the role of the minimum wage in raising incomes at the low end of the spectrum and alleviating poverty. The province of Ontario has just gone through an extensive consultation and review process and has increased its minimum wage to $11 an hour.
As is often the case in such debates, there was the regular chorus of anti-poverty advocates calling for more and business groups pushing the opposite. However, the evidence suggests that while they do help to increase wages ever so slightly at the low end of the income spectrum, higher minimum wages are at best ineffective as an anti-poverty measure.
This is surprising on its face. That said, when we dig a little deeper to identify those likely to benefit from minimum wage increases, the bluntness of the tool as an anti-poverty measure becomes clearer.
NOT THE SAME
There are two population subsets that are relevant in this conversation: poor people and people earning the minimum wage. It is assumed by many that those two subsets have a very large intersection. They do not. While there will always be anecdotes to illustrate the opposite, the median minimum wage earner is not an individual struggling through poverty. It is the student child of a relatively wealthy family, a pensioned senior volunteering for token pay, or a secondary earner in a middle class household.
Much media coverage of this difficult issue is based on anecdotal evidence and there are surely tens of thousands of poor Canadians earning the minimum wage. However, governments do not have the luxury of basing policy on anecdotes. Sound decisions are based on the totality of evidence. In this case, that evidence demonstrates that increasing the minimum wage primarily benefits those that don’t need it, and may even hurt those who can least afford it.
When the price of something increases, normally the demand for it decreases. A higher minimum wage represents a statutory increase in the price of low-skilled labour. Though it is difficult to believe some of the more outlandish claims of business groups that a 25-cent increase in the minimum wage would destroy tens of thousands of jobs, it is equally unreasonable to assume that there would be absolutely no behavioural impact on the part of firms when faced with mandated increased costs.
And the research indicates that the higher the minimum wage, the bigger bite further increases will take out of employment. Once the minimum approaches about half the average wage, further increases in it start to have negative impacts on hours and jobs. Most provinces are right around that level, and so face the prospect that further increases greater than the rate of inflation will have an impact on jobs.
In Ontario, an anti-poverty campaign advocated for a $14 floor to be set on wages. It is difficult to imagine that this would not have a negative impact on the quantity of labour demanded, representing as it does, much more than half the average wage in the province.
LOWER POVERTY RATES
Alleviating poverty is something that should be important to all Canadians. In recent decades economic growth and rising incomes have done a lot of the heavy lifting, and poverty rates in Canada are now lower than they ever have been. However there is a place for active government policy to go even further to reduce the burden of poverty on the least fortunate among us. The evidence strongly suggests minimum wage increases are not the way to go about it. More generous direct cash transfers to low-income Canadians through existing programs such as the GST rebate and the Working Income Tax Benefit are much more efficient at getting scarce resources to those genuinely in need.
For politicians, the minimum wage has the benefit of allowing for the perception of active anti-poverty policy without any cost to the public purse. But the effectiveness of a policy should not be determined by how little it costs the government. Businesses — and primarily small businesses — bear a great deal of the burden of ever-higher minimum wages. More importantly, at today’s levels, low-income Canadians also bear much of that burden through reduced hours and fewer job opportunities associated with a minimum wage that has a real impact on the quantity of labour demanded when it is increased further.
It’s hard not to appear heartless when arguing against minimum wage increases that outstrip inflation or general wage rises. However, effective policy should be based on the evidence at hand. If we are serious about actively reducing poverty in Canada, there are many more effective tools at our disposal. Let’s use them, and return the responsibility of implementing social policy from the private sector to the public sector where it belongs.
