Minimum wage laws an ineffective anti-poverty strategy

Policy choices that could cause employers to offer workers fewer hours counter-productive

By Ben Eisen
and Shaun Fantauzzo
Atlantic Institute for Market Studies

HALIFAX, NS, May 1, 2014/ Troy Media/ – Minimum wages are increasing steadily right across Canada. Nova Scotia, for example, recently boosted its hourly wage floor to $10.40. In June, Ontario’s will increase to $11 per hour. Since 2008, Manitoba’s minimum wage has increased 30 per cent.

Proponents suggest these increases will reduce poverty. Unfortunately, raising the minimum wage is an ineffective anti-poverty strategy. Governments should abandon this approach in favour of smarter anti-poverty measures that promote employment and more accurately target assistance to those in greatest need.

The minimum wage is an inefficient anti-poverty strategy for the simple reason that most minimum wage workers aren’t poor. Instead, many are secondary earners in non-poor households. In Ontario, for instance, the government-appointed Minimum Wage Advisory Panel revealed that only 12.5 per cent minimum wage earners lived in poor households. Raising the minimum wage further can therefore only be, at best, an inefficient and minimally helpful anti-poverty strategy.

Of course, some minimum wage workers do live in low-income households, and a higher minimum wage will make it easier for some struggling families to pay their bills. However, public policy is fundamentally about trade-offs, and in order to evaluate the impact of a higher minimum wage on poverty it is necessary to consider the harms as well as the benefits.

The most important drawback, identified by economists in both Canada and the United States, is that higher minimum wages discourage hiring. This is problematic from an anti-poverty perspective because obtaining and keeping full-time employment is the key to avoiding poverty. Research from the United States shows that only 2.6 per cent of full-time workers are poor according to the Federal Poverty Level standard. By comparison, 23.9 per cent of individuals who do not work and 15 per cent of part time workers are poor. Similar trends prevail in Canada – deep poverty is largely a product of unemployment and under-employment.

Since poverty reduction is the objective, policy choices that threaten to cause employers to offer workers fewer hours are likely to be counter-productive.

This consideration is particularly important in regions of the country where unemployment is chronically high. In Atlantic Canada, for example, the regional unemployment rate is 3.1 percentage points above the national average. In an economic climate where so many are struggling to find work, making it harder for employers to hire makes little sense.

Governments should not give up on trying to increase the purchasing power of the working poor, but should look for more effective ways to do so.

One better approach is the creation and enhancement of refundable earned income tax credits. These tax credits reduce the tax burden faced by lower-income individuals, and in some cases create negative income tax situations that boost annual wages.

The federal government took a step in this direction in 2007, when it created the Working Income Tax Benefit, (WITB), which is partially modeled on the American Earned Income Tax Credit (EITC). The American experience with the EITC over several decades has been successful. The Brookings Institution, a respected American think tank, reports the EITC has the effect of “lifting more than four million people out of poverty” every year.

The refundable tax credit approach boosts the take-home pay of the working poor, without creating hiring disincentives. Furthermore, the benefit reaches all low-income individuals – not just those working minimum wage jobs. Strengthening the WITB at the federal level and offering similar credits at the provincial level will do more to help the working poor than more minimum wage hikes.

As helping low-income families with young children is viewed as an especially urgent priority, creating targeted, provincial child allowances to assist with childcare costs or other expenses is another policy option worthy of consideration. Currently, the federal government provides all parents with a $100 cheque each month for each child under age six. A provincial supplement could improve on program design by using a means test, with an additional allowance paid to families with very low incomes, with the amount gradually diminishing to zero as income rises. Careful policy design would be necessary to avoid work disincentives,

Politicians are fond of raising the minimum wage because it allows them to look like they are helping the poor without incurring a direct expense to the treasury. Raising the minimum wage does, however, have real costs even if they are somewhat hidden. If governments are serious about helping struggling Canadians, they should move beyond minimum wage hikes and pursue anti-poverty policies that encourage employment and target assistance directly to those who most need the help.

Ben Eisen is the Director of Research, and Shaun Fantauzzo is a policy analyst, at the Atlantic Institute for Market Studies (www.aims.ca)

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