Can raising the minimum wage reduce poverty? Many voices on the left say that it can and that business, particularly big business, should have no difficulty offering slightly higher pay. Many on the right say that a higher minimum wage, or any minimum wage for that matter, is a job killer. The price of raising it, they say, will be paid for by workers themselves, in the form of fewer jobs and fewer hours.
Neither side has it quite right. The story of the minimum wage and its impact on poverty is complicated. Which is why Ontario’s Liberal government made the reasonable choice this week, when it announced that it was raising the minimum wage, but only slightly, to $11, and planning legislation to tie future increases to the rate of inflation. That puts Ontario’s minimum as the highest in Canada, but barely – most provinces are at $10 or slightly above. In the U.S., President Barack Obama is seeking to raise the federal minimum to US$10.10. And several provinces already automatically raise their minimum wage each year in line with inflation, or a mix of inflation and prevailing wages (which in a growing economy should rise faster than inflation).
In settling on an $11 minimum, the Ontario government split the difference between a union movement calling for a boost to at least $14, and those in the business community calling for the floor to remain at $10.25, where it’s been for the past four years. (There’s also a lower minimum wage for teenage students working part-time, which will rise to $10.30, and a lower minimum for bartenders and servers who earn tips.) Given the uncertainty over the economic impact of higher minimum wages, and more importantly the demographic makeup of minimum-wage workers, it’s the right balance. A slight rise in the minimum wage will not cause the sky to fall.
A generation ago, most economists assumed that minimum-wage laws were a bad idea. Why? Because they interfered with an efficient labour market. In a free and competitive marketplace, goes the theory, businesses by definition charge as much for their products or services as the market will bear. Acme Co. charges $5.99 for a widget because that’s the optimal price. If it could charge more, it would. If it doesn’t, it’s because it can’t. So when a new minimum-wage law orders Acme to pay its workers more, thereby squeezing profit margins, the company will respond in the only way it can: by hiring fewer workers, or giving its workers fewer hours. It will “pay” for the higher minimum wage by reducing the amount of work. A government that raises the minimum wage could, in theory, end up punishing the very workers it is trying to benefit.
That theory, however, is no longer entirely accepted, thanks to a quarter-century of empirical research by labour economists. There’s a great deal of evidence showing that the impact of a higher minimum wage can sometimes be more nuanced. Take the fast-food industry. Research suggests that there, a law raising the floor for worker pay may result in little or no job losses. In industries where foreign competition is not a factor (can the job of cashier at the drive-thru be outsourced to China?), there appear to be many cases where a higher minimum wage isn’t paid for through lower employment. Raising the minimum wage doesn’t necessarily backfire.
Higher minimum wages do not automatically translate into job losses, or economic disaster. Australia has a minimum wage equivalent to nearly $16, and their unemployment rate is lower than Canada’s. But boosting the minimum wage does have side effects. There’s no free lunch: Those higher wages must be paid for somehow. In the fast-food industry, for example, higher wages are likely to translate into higher prices on the menu.
Nearly two-thirds of Ontario’s half a million minimum-wage earners work in retail or accommodation and food services. The picture is roughly the same in the rest of Canada. These are the sorts of industries where the evidence suggests a higher minimum wage is less likely to boomerang back as lower employment.
But if raising the wage floor is supposed to be a poverty-reduction program, it looks like a very poorly targeted one. Some minimum-wage workers are older, and have been stuck at poverty-level earnings for a long time. But most minimum-wage workers are new to the work force. Nearly two-thirds of Ontarians earning minimum wage are under the age of 25. And more than two-thirds of that group is 19 years or younger. Given their youth, it’s no surprise that most minimum wagers are dependent children, living with their parents.
What’s more, most minimum wagers work only part-time. Again, that’s not surprising, since according to Statscan, most of those part-time, minimum-wage workers are teenagers or in their early 20s. The overwhelming majority of them are also students, holding part-time jobs while attending university, college or high school.
It means that the average Canadian minimum-wage worker is around 19 years old, living with her parents, going to school and working part-time. While some people on minimum wage, and many earning more than the minimum, are living in poverty, the average minimum-wage worker isn’t. That’s why a sharply higher minimum wage, right across the board, is not the ideal poverty-alleviation policy.
For that, turn to targeted programs like the Working Income Tax Benefit, a tax credit for low-wage workers and families. Bulking that up will cost real money, paid for by other taxpayers. It’s not as easy, or as seemingly free, as decreeing a higher minimum wage. But it comes closer to hitting the mark on poverty reduction.