By Robert P. Murphy
and Charles Lammam
The Fraser Institute
Last year, every Canadian province except for New Brunswick (which has an increase planned for this year) hiked its minimum wage. And campaigns are underway, most notably in Alberta, to boost the wage floor further to $15 per hour.
Such a policy appeals to many Canadians because they think it will help the poor. Yet as a new study published by the Fraser Institute shows, the minimum wage is a very blunt instrument that arguably hurts the working poor more than it helps. It’s time to shift the debate to more effective policies.
The first step in understanding the limitations of the minimum wage is to consider who actually earns the minimum wage. In 2012, 88 percent of Canadian minimum-wage earners did not live in low-income households, as measured by Statistics Canada’s Low Income Cut-Off (LICO), a widely used measure of relative poverty. On the other hand, the vast majority of workers who lived in low-income households (83 percent) earned more than the minimum wage.
Put differently, most Canadians who earn the minimum wage are not “poor,” and most of the working poor earn more than the minimum wage.
These surprising results occur because most minimum-wage earners are teenagers or young adults. In fact, nearly 60 percent of minimum-wage earners are ages 15 to 24, with the vast majority of them (85 percent) living with parents or other relatives.
And 20 percent of minimum-wage earners live with an employed spouse, meaning there are other earners in the household.
Crucially, just two percent of Canadian minimum-wage earners are single parents with at least one child.
Besides being a blunt instrument for helping the working poor, there are outright negative consequences of the minimum wage. A large body of evidence finds that government policies making low-skilled labour more expensive will cause employers to hire fewer workers. Our study reviews the Canadian research, which tends to find that a 10 percent increase in the minimum wage will likely decrease employment of teens and young adults by three to six percent.
It is true that several studies in the United States since the 1990s have challenged the traditional consensus among economists that minimum wage laws cause unemployment, but the Canadian evidence is much sharper and more consistent partly because of the wider variance in policy experimentation across provinces.
In any event, there is more at stake than simply the total number of jobs available for low-skilled workers. If employers are forced to pay higher wages to low-skilled workers, then they have the incentive to cut back on other forms of compensation (such as job training and health benefits). They might also “pass along” some of the higher costs of the minimum wage to their customers, which will have a disproportionate impact on the poor in some industries (such as fast food restaurants).
In short, the minimum wage is neither an efficient nor effective strategy for helping the working poor. Fortunately, there are better options available and with fewer negative consequences. The Working Income Tax Benefit (WITB), a federal program, represents one important example. The WITB, first implemented in 2007, provides a tax credit to low-income workers that rises with income up to a maximum refund. At a certain point the WITB begins to phase out with additional income, but only gradually.
The crucial advantage of the WITB is that it more efficiently increases the income of the working poor without making it harder for employers to hire less-skilled workers.
Canadians laudably want governments to pursue policies that will help the working poor. However, minimum wage hikes are a blunt instrument that may perversely hurt the poor by making it harder to find employment. The WITB is a much more sensible approach that targets the working poor.
Robert P. Murphy is a senior fellow and Charles Lammam is director of fiscal studies at the Fraser Institute. They are co-authors of Raising the Minimum Wage: Misguided Policy, Unintended Consequences.