Charles Lammam is director of fiscal studies and Hugh MacIntyre is a senior policy analyst at the Fraser Institute.
Everyone wants to help the working poor. Unfortunately, governments across the country (including Ontario, Alberta and British Columbia) are going about it the wrong way by committing to raise the minimum wage to $15 an hour – a misguided move that does a bad job of targeting the people we want to help and produces a host of unintended consequences.
But the recent federal budget, which made changes to the Working Income Tax Benefit – now renamed the Canada Workers Benefit (CWB) – features a better way to help the working poor.
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While the CWB has been around since 2007, it does not receive the attention it deserves as an effective policy tool. The budget proposes to enhance the program, which will almost certainly do more to help workers than minimum-wage hikes.
The CWB provides cash transfers to working Canadians below a certain income level – basically encouraging labour participation by rewarding work. The evidence from a similar program in the United States (the Earned Income Tax Credit) suggests this type of program boosts participation in the work force.
With the enhancements announced in the budget, couples or single parents with family incomes below $36,483 a year will receive a maximum annual benefit of $2,335, while single workers making less than $24,111 will receive a maximum of $1,355.
The family income threshold for receiving benefits is a critical feature of the CWB. It means the program targets working families with relatively low incomes. In contrast, the minimum wage does not efficiently target low-income families, as 88 per cent of minimum-wage earners in Canada do not live in low-income households, as defined by Statistics Canada's low-income cut-off.
While this may sound counterintuitive, the reality is that most minimum-wage earners are not the sole or primary earners in their household. Typically, they are young people living at home with their parents or people with an employed spouse.
This highlights the fundamental problem with the minimum wage: It's not a well-targeted anti-poverty tool. The CWB, on the other hand, does a much better job of ensuring that families with relatively low incomes benefit from the policy.
But the problem is not just that the minimum wage ineffectively targets the working poor; it also makes it harder for less-skilled people to find work. When employers are forced by government 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 benefits.
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In some cases, businesses pass along the higher labour costs to customers in the form of higher prices, which, perversely, has a disproportionate impact on the poor.
Crucially, unlike minimum-wage hikes, the CWB does not artificially raise costs for employers and therefore does not have the same economic drawbacks.
Not that the CWB is perfect. It could discourage some recipients from working because, over a certain income level, benefits are reduced for every extra dollar earned. However, the federal budget has taken steps to mitigate this problem by lowering the benefit-reduction rate from 14 per cent to 12 per cent.
Over all, the CWB is a much better way to help the working poor than raising the minimum wage. If governments truly want to help, they should abandon any planned minimum-wage hikes and focus on policies such as the CWB.