A Ramble through the Bramble of Minimum Wages

by Terrance Hunsley

Normally I like reading reports published by the Fraser Institute. They usually start from a philosophical perspective that I respect but don’t share – for example, that the role of government in the society and economy should be kept minimal.  But their research is usually competent.  They point out when a policy is not achieving its goals. So while I don’t usually agree with their recommendations, I appreciate the critical analysis.

Recently though, they have published a couple of papers which generally oppose increasing minimum wages based on what seems to me, not very convincing analysis. But surprisingly, I find myself mostly agreeing with the recommendation, although I’m not convinced that raising the minimum wage is not a good idea.

A paper by Phillip Cross sets out the arguments:  

Minimum wage increases do not help the poor, because only about 5% of the full-time workforce are minimum wage workers, and half of them are young and living with other people who have money to help. 

But another 5% are working part-time, and a third of those are working two or more jobs. We also know that there are many more working within a couple of dollars of the minimum wage. These are not students working for beer money. And when the minimum wage is increased, usually within a couple of years, the wages of those just above the minimum are moved up too.

In fact, the proportion of minimum wage workers over the age of 25 has increased to more than half. The layer just above them would have even more workers over 25, and it is a big layer. Canada has one of the OECD’s highest percentages of low wage workers, with just under 20% of workers earning less than 2/3 of median full-time wage.  And to put a finer point on it, the median full-time wage has not moved very much in the past forty years, while the top third of the income scale has moved steadily upward.  Inequality in a nutshell. 

Raising the minimum wage decreases the number of jobs.

He suggests that minimum wage increases might reduce employment and work hours of young and low-skilled workers. He claims that most economists believe this. And why not? They were taught in every one of their undergraduate economics courses that as prices rise, demand decreases.  However, Cross admits there is little by way of substantial analysis that demonstrates it. It is hard to measure, and recent instances of rises in minimum wage have not shown any decrease in employment.

Raising the minimum wage will make businesses less profitable. 

I guess that could be true if the business makes no adjustment. Some of the most profitable businesses in the world are the ones who pay low wages. Think Walmart, or McDonalds. Or the companies who make large profits with long term care homes while requiring health care workers to work for low wages, often cobbling together two or more part time jobs, and receiving no sick leave. But don’t fret too much about those companies not getting enough profit. Cross points out they will adjust by eliminating “automatable jobs” or replacing them with higher-earning workers, or by raising prices. But wait! Don’t we actually encourage employers to eliminate automatable jobs by giving them a tax credit for investing in labour-eliminating technology? And are we not in a demographic pickle right now, with too few young people to replace the retiring baby boomers? Isn’t that why we bring in hundreds of thousands of temporary foreign workers? 

Wouldn’t this seem to be the best time to eliminate low-paying, low-productivity jobs? With the wave of labour-replacing technology rolling through the economy, should we not be encouraging a shift to more capital-intensive, higher-paid work? Bear in mind that the education and skill levels of people in low end jobs do not differ as much from those higher up, as the difference in wages would suggest. The difference in pay levels reflects the difference in bargaining power of workers more than ability or effort. 

Minimum wage increases could increase the cost of goods and services.  

Actually, so could increases in wages for CEO’s, engineers, lawyers, doctors, accountants and scientists.  But yes, minimum wage increases could lead to price increases.  But doesn’t that mean that people who now don’t get a living wage for their work, are in fact, subsidizing the rest of us to keep prices down?  As Cross points out:

The Financial Accountability Office of Ontario estimated that a 27% hike in the minimum wage to $15 an hour would raise overall consumer prices in Ontario by 0.5%, which in turn would dampen the rise in consumer spending.

Seems to me that forgoing a 27% increase in wages to protect us  (subsidize us) from a 0.5% increase in our costs, is really quite a sacrifice. Imagine if we were to suggest a tax increase of 27% of our income to subsidize low wage workers?

Cross points out that some European countries do not have minimum wages and have fewer low paid workers. True. Those countries have instituted forms of business-labour negotiation or cooperation which sets wages on a sector basis and at a higher standard.

Cross’ main point though, is one which rings true for me, even if the ring seems a bit like a death knell of the hopes of earlier days. He suggests that if we want business to ensure that everyone gets a decent income, we probably won’t get there.

The record of the past forty years bears that out. When businesses were permitted to offshore jobs; when we liberalized our labour markets to permit employers to fragment employment into part time, contracted and gig work; when we permitted the decimation of unions in the private sector; we deprived workers of any power to negotiate wages. And up until ten years ago, there were so many young people seeking jobs that the business could set the wage where it wished.  As a result, defined-benefit pensions disappeared. Longterm security of employment disappeared. The role of the employer as an agent of social policy disappeared.   

Politicians have placed more emphasis on the number of jobs than on their quality. Provincial governments have never been willing to require a minimum wage which sustains an independent life for the worker. They don’t question whether those workers that Cross says don’t need help because they live with their parents, are living with their parents because their wages won’t permit them to rent an apartment and feed themselves? In the statistics it is called a job. It should be called underpaid work, and not counted as a job.

Given that business has been permitted to abandon the role of ensuring decent income and security for workers, government needs to institute a working income floor. 

So Cross’ recommendation at the end does make sense. If we want workers not to live in poverty it should probably be done mainly through the Canada Workers’ Benefit. It is a small tax credit now, but could be increased to bring every worker who works a normal work week or month, up to a prescribed level. 

To do something substantial (my recommendation) we could establish a floor full-time income of 2/3 of the average full-time wage in the economic region. That would work out to be about $15/hr in the Atlantic region, and a bit more in other parts of the country. As a percentage of the average, it would rise with the economy. It would be a substantial expenditure, but would probably not meet too much opposition because employers would see it as a better alternative than a big increase in the minimum wage. 

It would not solve all problems, and I think that the minimum wage should be enhanced over time to eliminate the need for the public subsidy. But it would support a broad ethic that full-time work should enable a person to be independent. If the business is so important that it needs to be subsidized, let the subsidy come from the more affluent society, not the underpaid worker. 

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