VANCOUVER, BC/ Troy Media/ - Activist groups across the country are pushing for higher provincial minimum wages, framing them as a way to help Canadians escape poverty.The aim of helping poor families is something we all want, but increasing the minimum wage isn't the right policy.
It sounds straightforward: get the government to legislate a higher wage so low-wage workers earn more. This oversimplification fails to account for a number of facts including who actually earns the minimum wage and the unintended consequences minimum wage hikes.
The vast majority of minimum wage earners are not part of poor households. (Poor in this sense is defined by Statistics Canada's low income measure which is not a measure of absolute poverty but rather relative low-income.) According to a major report for the Ontario government, 81.5 per cent of minimum wage earners in Ontario in 2012 did not live in poverty. This surely presents a conundrum for those advocating minimum wage increases as a way to fight poverty.
What explains the counter-intuitive reality about minimum wage earners? Most are not the sole income earner in their household but in fact young people starting out in the labour force while in school. The same Ontario government report indicates that 61.8 per cent of minimum wage earners are between the ages of 15 and 24 and that 56.3 per cent of minimum wage earners are living at home with their parents.
17.4 per cent of the remaining have working spouses, meaning their household income is higher than what a single minimum wage would provide. Thankfully, the image of a single parent struggling on minimum wage to make ends meet is a rarity as single parents make up only 2.6 per cent of minimum wage workers.
This basic data on minimum wage earners helps to explain why academic studies consistently find that minimum wage increases do not reduce poverty. At best, Canadian researchers find no statistically significant effect. At worse, they find minimum wage increases can actually increase relative poverty. Poverty can increase when minimum wage hikes make some low income households worse off by reducing employment opportunities for young workers in the family.
The tendency for young and low-skilled workers to be negatively affected by minimum wage hikes is clearly highlighted in a comprehensive review of over 100 academic studies on the subject by Professor David Neumark, the foremost expert on minimum wages.
The over dozen Canadian studies examining provincial minimum wage hikes are more conclusive and show larger negative effects than in the United States. On average, the Canadian evidence finds that a 10 per cent increase in the minimum wage decreases youth employment by between 3 and 6 per cent.
The economics of these findings are as follows. When governments impose a minimum wage higher than what would otherwise prevail and without corresponding productivity increases, employers find ways to operate with fewer workers. While the more productive workers gain through a higher wage, their gain comes at the expense of others who lose as a result of fewer employment opportunities. Young and low-skilled workers are most adversely affected because they possess less job qualifications and experience.
Minimum wage hikes ultimately rob young people of the opportunity to gain work experience that helps them develop basic skills and earn higher levels of income. Indeed, research finds that earning the minimum wage is often a stepping stone to higher paid work.
But focusing solely on the employment numbers misses other negative effects from minimum wage hikes. Employers also respond by cutting back on hours, providing less on-the-job training and giving employment priority to the most productive workers.
Minimum wage activists also ignore the policies currently in place that help augment the income of low-wage workers. For instance, the Working Income Tax Benefit (WITB) provides a subsidy to workers, depending on their family circumstances and where they live. Unlike the blunt minimum wage instrument, WITB actually targets benefits and imposes almost none of the negative side-effects noted above.
If we are genuinely interested in helping the poor, we first need to know who they are and what makes them poor to begin with. Hiking the minimum wage will impose large costs and do nothing to reduce poverty in a meaningful way.
Charles Lammam is associate director of tax and fiscal policy and Hugh MacIntyre is policy analyst at the Fraser Institute. Links to the academic research cited in this article are available upon request. Email: [email protected].
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