A $15 minimum wage for BC would put a serious dent in working poverty

April 16, 2015

BC is a prosperous province in a prosperous country, but we have done a poor job of sharing that prosperity. Inequality in BC has increased substantially over the last 30 years and we’ve had the worst or second worst poverty rate in Canada for several years running. Inequality and poverty tear at the fabric of our society, our economy and our democracy.

What can we do about this? In a recent report for the Canadian Centre for Policy Alternatives, I argue that raising the minimum wage can be an important part of a broader policy solution, provided we are bold enough. At the current minimum wage – or even $2 more – a single person working full time/full year ends up below the poverty line, so it’s not surprising that business-as-usual changes in the minimum wage don’t have a big impact on poverty. But at $15 an hour that person moves above the poverty line and inequality in wages is substantially reduced.

Minimum wages are a way to express and enforce our commonly held notion that workers should be fairly compensated for their labour. The current $15 minimum wage campaign is about a specific fairness ideal: that no one should work full year/full time and end up in poverty. I believe that in most people’s minds this reality violates a basic social contract: that hard work deserves to be compensated with a life of dignity – or, at least, not working your way into poverty.

Any policy choice involves a trade-off between costs and benefits, and this one is no exception. The main potential downside to raising the minimum wage so much is the risk of losing jobs. The debate over this point has been fierce and polarized.

At one extreme, opponents of nearly any increase in the minimum wage portray it as an economic disaster. But with minimum wages in the range where they have traditionally been set, both the historical record and the best estimates in the research literature indicate that this is simply not credible.

Just before the last major increase in the BC minimum wage from $8 to $10.25, the Fraser Institute put out a report focusing on the job market for young people in which they concluded, “an increase in BC’s minimum wage to $10.25 an hour could lead to over 52,000 job losses” for workers under 24. That amounts to a 16% job loss for that age group. But two years later, the employment rate for people under age 24 in BC had decreased by only 1.6% relative to other provinces, and most of that can be accounted for by the increased propensity of young people in BC to go to school. In other words, even a 25% increase in the minimum wage did not bring economic disaster — or, really, much effect at all in terms of employment. Interestingly, that is what a careful reading of the research literature would have predicted.

It’s hard to predict the impact of a $15 minimum wage, however, since it’s larger than previous increases. Using what I believe are the most reliable estimates of the effects of wage costs on employment, my best estimate is that moving to a $15 minimum would decrease the employment rate by about 1%. So there is a cost, though it’s far from the claims of economic disaster put forward by opponents. And I would argue that the benefits far outweigh the cost. In particular, for those who currently earn between $10.25 and $15 per hour (who will be most directly affected) the increase in wages is far greater than any decrease in employment. Combining the increase with a well-functioning unemployment insurance system would make sure the benefits and costs were widely shared.

But won’t a minimum wage increase put small businesses out of business? The historical record says no. The increase from $8 to $10.25 did not cause mass shutterings of businesses. In part, that is because when all firms face the same wage increase, they are able to pass some of it on through increased prices. Since minimum wage workers are generally not a large percentage of costs, this price effect is likely not large. But it means that the wage increase is shared among all of us, which is the right approach for battling poverty.

An increase in the minimum wage to $15 per hour would make a serious dent in working poverty, eliminating the current unfair situation where a person can work full year/full time and still be in poverty. Like any policy, there are costs and benefits. Arguing that the costs are either infinitely large or zero is unrealistic. It’s time for a reasoned debate on policies that will actually reduce inequality and poverty.