Raising the minimum wage is a flawed strategy for achieving the critically important social objective of raising people out of poverty
As the old saying goes, the road to hell is paved with good intentions. But good intentions alone aren’t enough to justify government policy. Real-world evidence matters.
B.C. Premier John Horgan nonetheless recently announced plans to raise the province’s minimum wage by 34 per cent over four years, from its current hourly rate of $11.35 to $15.20 by 2021. Horgan made clear his good intentions when he spoke of lifting “people out of poverty.”
We certainly applaud this sentiment and share the premier’s goal. Unfortunately, the evidence shows that raising the minimum wage is a flawed strategy for achieving this critically important social objective.
For starters, the minimum wage does a poor job of targeting the people we want to help: the working poor. According to data from Statistics Canada, the vast majority of B.C.’s minimum wage earners don’t live in poverty. In fact, 89 per cent are not part of a low-income household.
While this may sound counterintuitive, it makes sense once you realize that the overwhelming majority of minimum wage earners aren’t the primary or sole earner in their households. They are mostly teenagers or young adults working their first jobs or working part-time while in school. In B.C., 54 per cent of minimum wage earners are under the age of 25, with the vast majority living at home with parents or other relatives.
Another 19 per cent of all minimum-wage earners live with an employed spouse who often earns more than the minimum wage. So even older minimum wage earners tend not to be the sole breadwinners in households.
Thankfully, a single parent struggling to get by on minimum wage is pretty rare – only 2.1 per cent of minimum wage earners are single parents.
The fact that the minimum wage ineffectively targets the working poor helps to explain why Canadian research finds that past hikes have failed to reduce poverty. To the extent that some people do gain, 70 per cent of the income gains go to non-poor households.
In fact, one study found that raising the minimum wage can increase poverty because job losses associated with a higher minimum wage are disproportionately felt by the poor. Specifically, 47 per cent of job losses are felt by the poor or near-poor (those with incomes less than 50 per cent above the low-income threshold).
But the problem is not just that the minimum wage ineffectively targets the working poor. It also makes it harder for less-skilled workers in our society to find work.
When employers are forced to pay higher wages to young workers with little work experience and skills, they tend to cut back on the number of people they employ, work hours, and other forms of compensation such as job training and/or fringe benefits.
In some cases, they pass along the higher labour costs of the minimum wage to their customers in the form of higher prices, which, perversely, has a disproportionate impact on the poor.
Fortunately, there are better policy options available to help the working poor with fewer negative consequences.
The government could help the working poor by topping up their wages.
The Working Income Tax Benefit (WITB), a federal program, represents one important example. First implemented in 2007, the WITB provides a cash subsidy to low-income workers. At a certain point, the WITB begins to phase out with additional income, but only gradually.
The WITB more efficiently increases the income of the working poor without making it harder for employers to hire less-skilled workers.
When it comes to helping the working poor, good intentions aren’t good enough. Evidence should guide policy. Raising the minimum wage doesn’t provide the desired results.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is senior policy analyst at the independent non-partisan Fraser Institute (www.fraserinstitute.org)
By Charles Lammam and Hugh MacIntyre