By Charles Lammam
and Jason Clemens
The Fraser Institute
The new NDP government in Alberta has indicated it will aggressively increase the province’s minimum wage from $10.20 to $15 per hour over the next three years. There are a number of problems with this campaign promise that is now becoming policy. Ignoring experience and pursuing policies based on good intentions and ideology will not solve the province’s pressing problems.
First, and contrary to some pundits, there is a preponderance of evidence, particularly from Canada that minimum wage increases adversely affect low-skilled and young workers. A recent comprehensive review of international research led by Professor David Neumark concluded the balance of the research shows that minimum wage hikes negatively affect employment among low-skilled and young workers.
Canada is often used for minimum wage research because of the variation between provinces. There are more than a dozen Canadian studies examining provincial minimum wage increases. The Canadian evidence finds, on average, a 10-per-cent increase in the minimum wage decreases youth employment by between 3 and 6 per cent.
Simply put, 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 and/or reduced labour costs. While the more productive workers gain through a higher wage, their gain comes at the expense of those who now have fewer employment opportunities. Young and low-skilled workers are most adversely affected because of their dearth of experience and skills.
The NDP’s plan to hike the minimum to $15 is clearly linked with moves in the U.S., including high-profile examples in Seattle and Los Angeles. Unfortunately, the real-world experience in Seattle confirms the research noted above as many small businesses are downscaling employment in an attempt to manage costs.
Increasing the minimum wage will lead to less opportunity for young Albertans
Second, while the intentions of the government may be noble in terms of trying to help the poor, empirical research in Canada has consistently found increasing the minimum wage does not reduce the share of Canadians living in poverty. One academic study, for instance, found minimum-wage hikes actually increased the share of families falling below the relative poverty line, which suggests low-income families are especially hurt by the reduced employment opportunities from minimum wage hikes.
The key reason minimum wage hikes do not generally reduce poverty is because so few of those earning the minimum wage live in poor households. According to Statistics Canada data, 50 per cent of minimum wage workers in Alberta in 2014 lived with their parents and the majority of these individuals were aged 15 to 24 and in school. Of the remaining minimum wage workers, 26 per cent had working spouses, which means their household income was higher than would be expected by a single minimum wage earner. The reality of who actually earns the minimum wage is distinctly different from the general perception and certainly the narrative offered by the current Alberta government.
Indeed, according to Statistics Canada, only 1.5 per cent of minimum wage workers were single parents with young children. Surely, we can all agree that a program designed to help this group would be beneficial but that doesn’t entail changing the minimum wage for the remaining 98.5 per cent of low-skilled workers.
Eroding Alberta’s leadership
Third, Alberta has a long history of policy leadership in the country, meaning that when Alberta gets things right, it tends to encourage other provinces to follow. Conversely, when Alberta gets it wrong, like aggressively increasing the minimum wage, it also encourages other provinces to follow suit.
Finally, at a time when most Albertans and many investors outside of the province are anxiously assessing the direction of policy, this is yet another sign that the government intends to act dogmatically and ideologically rather than pragmatically. In addition, such policy changes do nothing to clarify what the new government intends to do on the province’s most pressing issues such as deficits and energy. This worryingly echoes the experience of Bob Rae and the NDP in Ontario in the early 1990s, which didn’t end well.
Charles Lammam and Jason Clemens are economists with the Fraser Institute.