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The minimum wage does not prevent zero salaries; instead it prevents workers and employers from agreeing to an $8 an hour salary. (John Cowie/iStockphoto)
The minimum wage does not prevent zero salaries; instead it prevents workers and employers from agreeing to an $8 an hour salary. (John Cowie/iStockphoto)

Economy Lab

Why hiking minimum wage is useless in fighting poverty Add to ...

President Barack Obama’s proposal to hike America’s minimum wage has sparked controversy not only in the United States, but Canada as well. And as some see it, it’s a useless move.

Useless as an anti-poverty strategy because the overlap between minimum-wage earners and people under the poverty line is quite low.

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An hourly wage rate is a poor proxy for yearly household income, because it fails to include the number of hours worked, income from other jobs and investments, income of other household members, or even if the person has a job to begin with.

For an anti-poverty measure to be successful, it needs to target total annual family income, not hourly personal labour income. There are methods for this, including increased GST/HST credits.

All of this should raise the question: If raising the minimum wage for anti-poverty purposes is, at best, pointless, then would lowering it also have little effect on poverty? What if it were abolished entirely?

This point was not lost on others.

On Twitter, an advocate of higher minimum wages argued that the minimum wage is necessary, as without it we would have more Canadians working for zero wages.

But zero wages are perfectly legal under minimum wage laws, whether it be through volunteer work, unpaid internships (with some restrictions) or simply by mowing one’s own lawn rather than through hiring. Home production is still a form of labour, though one with a zero wage due to the lack of a market transaction.

The minimum wage does not prevent zero salaries; instead it prevents workers and employers from agreeing to an $8 an hour salary.

Since that option is off the table, the pair must agree to one of the following: A labour contract at the minimum wage, some form of volunteer or unpaid internship relationship, or simply decide to part ways.

While many will choose the higher wage, some non-zero proportion of that work will end up being completed either through volunteering, unpaid internships or from the employer doing the work herself. Through that mechanism, the minimum wage increases, not decreases, the amount of work done for zero wages.

Rejection of the minimum wage as a labour market policy should not be seen as a rejection of the idea that those in poverty need our assistance.

Rather the issue is the ability of the minimum wage (or increasing the minimum wage) to achieve society’s goals.

If the goal is to reduce poverty in Canada, the minimum wage is pointless; if the goal is to prevent people from working for nothing, the minimum wage is counterproductive.

There are policies that would be useful in achieving those noble goals, such as the GST/HST credit, which is long overdue for an increase.

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, University of Western Ontario.

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