By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
The Ontario Liberals and Ontario Progressive Conservatives both recently announced how they intend to help the working poor if they win the June 7 provincial election. Unfortunately, neither party has the right policy for targeting those who need help the most.
First consider the Liberal approach under Premier Kathleen Wynne, who (along with the NDP) proposes to raise the minimum wage from $14 to $15 – on top of the recent increase from $11.60.
According to CBC News, the $1-per-hour hike would result in a full-time minimum wage earner gaining $1,553 in after-tax income each year (or $970, assuming a 25-hour work week). But the CBC overstates the benefits of the hike by ignoring important unintended consequences of the policy. The consensus of Canadian academic research is that a higher minimum wage reduces employment for less-skilled workers.
When employers are forced by government to pay higher wages to young workers with little work experience and skills (those who comprise the bulk of minimum wage earners), they tend to cut back on the number of people they employ, their work hours, and other forms of compensation such as job training and/or fringe benefits. In some cases, the higher labour costs of the minimum wage are passed on to customers in the form of higher prices, which, perversely, has a disproportionate impact on the poor.
While minimum wage workers (who remain employed, without seeing their hours cut) may benefit, other young and low-skilled workers who lose their jobs get hurt. And those lucky enough to keep their jobs – but see their hours cut – may actually end up earning less money if the higher wage rate is not enough to offset the reduction in hours. According to a study by University of Washington researchers, this is precisely what happened in response to recent increases in Seattle.
So by ignoring the adverse employment effects, Ontario’s Liberals overstate the financial gain of a $15 minimum wage for many minimum wage earners.
The Doug Ford Ontario PC proposal – to keep the minimum wage at $14 (increasing it in later years to keep pace with inflation) and to exempt minimum wage earners from provincial income taxes – has its own problems.
For starters, most minimum wage earners (59 per cent) in Ontario work part time and pay little income tax due to existing tax deductions and credits. So many would likely not benefit from the PC income tax exemption plan.
More broadly, both proposals share a fundamental shortcoming: they rely on the minimum wage to help the working poor despite the reality that this policy ineffectively targets workers most in need.
In Ontario, the vast majority of minimum wage earners (85 per cent) don’t live in low-income families, as defined by Statistics Canada’s low-income cut-off. Most minimum wage earners aren’t the sole or primary earners in their households. Typically, they are teenagers or young people living at home with their parents or have an employed spouse who earns more than the minimum wage.
So if minimum wage hikes aren’t the answer, what is?
A work-based subsidy that would provide a cash transfer to working Ontarians with family incomes below a certain level (similar to the federal government’s Canada Workers Benefit). This approach more effectively targets the people we want to help without producing the economic drawbacks associated with mandating higher pay for less-skilled workers.
While helping the working poor should remain a fundamental goal of any government, both major parties in Ontario propose to go about it the wrong way.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is a senior policy analyst at the Fraser Institute.
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