Minimum wage increase is good public policy

July 1, 2000

The BC government has asked for input on whether or not to increase the minimum wage, and business groups have responded with a three-pronged attack. First, they declare, minimum wages are "job killers". Second, they largely help kids from well-to-do families doing part time work. Third, we should consider tax credits instead.

We recently completed an in-depth study of minimum wages in Canada, and our findings dispute the claims of business groups. We found negative employment impacts are small. Moreover, in a time of employment growth such as we are experiencing now, these effects will not come in the form of layoffs, as business implies, but as a negligible slowdown in job growth. Minimum wages are a bit player among the forces determining employment levels. Our research shows that, over the past two decades, large increases in the minimum wage have been followed by both increases and decreases in employment, demonstrating that other trends in the economy have much more influence on employment than does the minimum wage.

Business groups are arguing that if we foresee any negative effects of a minimum wage increase, we should not do it. This is a silly position. All policies have costs. Even building a new bridge that will benefit almost everyone will reduce business for a store owner beside the old bridge. The question is whether the benefits outweigh the costs. Our study shows that, with respect to increasing the minimum wage, the answer is yes.

Even taking into account conservative disemployment assumptions, we find that increasing the minimum wage generates an increase in the total amount of money (the wage bill) going to low-wage workers (and this holds true for all age and gender groups).

The second argument raised by opponents of the minimum wage is that it benefits mainly teenagers, most of whom live at home in comfortable middle-class families. Not true. This criticism is based on a popular misconception about who minimum wage workers are. According to Statistics Canada, 61 per cent of minimum wage workers are adults, and 64 per cent are women. A majority of minimum wage workers between 20 and 25 were full-time students at some time during the year, indicating minimum wage jobs are an important source of income for many students seeking to finance their post-secondary education.

Most importantly, our research clearly shows that minimum wage earners are over-represented among families with low incomes. Thus, increasing the minimum wage will disproportionately benefit low-income workers and families.

Perhaps the most interesting statement from minimum wage opponents is their call for increased tax credits for the poor in place of minimum wage increases. We are happy to hear this call for positive initiatives to help the poor. However, we disagree with a "one or the other" approach. What we need is a comprehensive and multifaceted anti-poverty strategy.

The minimum wage should be seen as part of a larger set of tools aimed at reducing poverty and inequality. Moreover, to eliminate the minimum wage (or effectively reduce it by letting inflation eat it away) and instead increase tax credits has negative side effects--namely, it sees taxpayers-at-large subsidizing industries and employers that pay inadequate wages. A tax credit in combination with a meaningful minimum wage, however, would be a positive response to the problems facing the working poor.

How, then, should the minimum wage be set? We propose the following criterion: in a just society, no one working full-time should have an income below the poverty line.

At $7.15 per hour, BC has the highest provincial minimum wage in Canada. But even at that rate someone working full-year at 40 hours per week earns an annual pre-tax income of only $14,872. That's too low. This amount falls $1,774 below the Statistics Canada Low Income Cut Off (LICO) -- more commonly known as the poverty line -- for a single person in a large urban centre.

The minimum wage would need to increase to $8 per hour in order for this individual's gross income to equal the poverty line. And there is no good reason why such a goal should remain out of reach.

BC's neighbour to the south, Washington state, has a minimum wage of $6.50 per hour, which in Canadian dollars is equivalent to about $9.75. Moreover, after accounting for inflation, real minimum wages in Canada have fallen dramatically from their peak value in the mid-1970s. Even with increases since 1995, the purchasing power of BC's minimum wage is about $1.50 less than it was in 1976.

Minimum wages cannot end poverty on their own, but they can be an effective anti-poverty tool in a larger policy toolbox needed to raise the floor for low-income people.