Business and Economy
A better way to help the working poor
While experience has shown there was room for the minimum wage to grow, there remains a limit to how far it can rise above inflation without causing economic harm. (Pexels Photo)
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Minimum wages are going up – Quebec raised its rate on May 1 and Ontario and British Columbia followed on June 1. Some see the increases as insufficient to meet current costs of living while others argue they are too costly and will lead to massive layoffs.
Clearly the only people who will benefit directly from higher minimum wages are those who are employed or find a job. For a long time, economists considered minimum wages as harmful to employment, assuming competitive markets would make firms unprofitable if they raise prices or wages.
With help from business lobbyists, they succeeded in convincing policymakers for decades. Minimum wage purchasing power went through a prolonged decline. Between 1995 and 2005, the Ontario minimum wage increased by about 10 per cent while the cost of living, measured by the consumer price index, increased twice as fast.
However, several empirical studies have since shown that minimum wage increases have only a minimal impact on employment. Many sectors and regions are dominated by a few large firms with significant market power – firms that can raise prices and underpay workers relative to the value those workers generate. Companies like Amazon could pay a higher minimum wage without going bankrupt.
Some studies even suggest that raising minimum wage could improve worker purchasing power, stimulating the economy and employment. These findings have shifted the consensus and since 2005 the minimum wage has grown at about the same pace as the median wage, and faster than the cost of living.
Should it have grown even more?
While experience has shown there was room for the minimum wage to grow, there remains a limit to how far it can rise above inflation without causing economic harm. Firms can only absorb higher costs and increase prices so much before becoming uncompetitive or unprofitable. Not all firms have the pricing capacity or the profit margin of Amazon. The risk of job loss differs across sectors, but it is highest for inexperienced workers in small businesses.
In Canada, a full-time minimum wage worker earns enough to be above the official poverty line but not enough to live a healthy life. Research suggests that a healthy, living wage would require boosting the minimum by more than 50 per cent – a move that would almost certainly lead to job losses.
A wage-hike paradox
Paradoxically, minimum wage hikes can hurt the very people the policy is meant to help. Job losses and hiring slowdowns often harm students and entry-level workers – those seeking a foothold in the labour market or trying to pay for education.
Moreover, many minimum wage workers do not live in low-income households. This weakens the policy’s effectiveness as a tool for reducing inequality and introduces what economists call “deadweight loss.”
There may be more efficient ways to support equality and low-income workers. One option could be to expand the Canada Workers Benefit (CWB), which tops up the earnings of low-wage workers. This program currently pays a single individual a maximum of $1,518 per year (or $29 per week). That’s not enough to help a vulnerable low-income Canadian thrive or provide an incentive to work more hours.
Raising the CWB maximum could put money in the pockets of people who need it and incentivize work. It could be restructured to act like a negative income tax or partial basic income, providing some money to those out of work. Recent studies show that the labour disincentive effect of this type of measure is likely small and it could help reconnect people to the labour market. Provinces could tailor the program to local needs.
Timing is everything
A big problem with the current program is the timing of payments – they are made quarterly or annually. Low-income workers often live paycheque to paycheque and cannot afford to wait the next fiscal year to pay their groceries. In the digital age, there is no reason the Canada Revenue Agency couldn’t work with employers to integrate the benefit into weekly paycheques.
It is true that expanding the CWB would carry a fiscal cost. But it could be financed by a new payroll tax similar to how employment insurance is funded. Payroll taxes have a smaller negative impact on employment and would likely be more acceptable to small businesses.
A complementary option would be to strengthen labour protections and collective bargaining power. It is disturbing that Canada has no mandatory minimum number of paid sick days outside federally regulated sectors. Stronger employment standards and policies to promote unionization would help rebalance bargaining power between workers and employers.
Governments appear to be going in the opposite direction. Their tepid response to the closure of recently unionized Amazon warehouses was a missed opportunity to support workplace rights.
Setting minimum wages high enough to guarantee a decent living can backfire, putting people out of jobs and making it difficult for vulnerable people to find one. Since employment is one of the most important factors for securing mental health and wellbeing, the unintended consequences of minimum wage increases must be taken seriously.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
