October 1, 2010
The Hidden Costs of Today’s Minimum Wage Increase
Raising the Minimum Wage Hurts Business and the Unemployed
Today, Manitoba’s minimum wage increases from $9.00 to $9.50. Labour and Immigration minister Jennifer Howard claims the increase will help low-wage workers “buy things they need for their families.” Politicians love raising the minimum wage because they can claim to help the poor without costs to the treasury. But there are costs associated with increasing the minimum wage – even if they are sometimes hidden.
Raising the minimum wage increases the purchasing power of families that include a minimum wage worker. This is the major benefit of the policy- but there are costs to be weighed against it. Most importantly, employers are profit-maximizing actors who do not merely react by paying the new wage and carrying on exactly as before. Instead, they adjust hiring decisions to offset the higher costs that they face. Specifically, they hire fewer unskilled workers.
This is what happens when you raise the price of any good or service, whether it is oranges, computers or unskilled labour. A recent Department of Labour meta analysis of Canadian empirical research on minimum wages confirmed this principle applies to the labour market in Canada. Canadian research has consistently found negative employment effects from higher minimum wages. It is sadly ironic that a higher minimum wage – billed as part of Manitoba’s anti-poverty strategy - will actually make it harder for some people to find jobs.
Job seeking unskilled workers aren’t the only ones hurt by higher minimum wages. For firms employing large numbers of these workers, minimum wage hikes reduce profitability and can even make it impossible to survive during hard times.
Consider that in 2009, the average wage in Canada increased by 1.6 per cent. Wage growth was minimal because the economy was in recession. Compare this to the 5.8 per cent increase in the minimum wage in Manitoba last year, when the wage floor went from $8.50 to $9.00. Industries that hire lots of low-wage workers were not immune to the pressures for wage restraint affecting everyone else. But the law required them to give significant wage increases, even if revenues were in decline.
Although the economy is still struggling, Manitoba’s government will today require employers to give minimum wage workers another 5.5 per cent increase –a total of 11 per cent in just 18 months. Wisely, the Manitoba government itself has announced a public sector wage freeze because it cannot balance the books if wages keep rising while revenue growth remains slow. The government needs to recognize that businesses are facing similar revenue shortfalls. Forcing companies to pay higher wages in this economic environment threatens to put people out of businesses.
The costs of today’s minimum wage increase will be significant. What’s more, the benefits of the policy in terms of fighting poverty are small. Research shows the majority of the benefits of higher minimum wages do not flow to poor families but to secondary earners in middle-income households. Even those extra wages that do flow to low-income families are largely recaptured by government due to increased taxes. An analysis by the Canadian Federation of Independent business showed that the new minimum wage will result in an increase of only $488 per year in take home pay for a full-time minimum wage worker.
There are better strategies for helping low-income households. The simplest is to reduce their tax bill. Manitoba’s basic income tax exemption is among the least generous in Canada. Low-income Manitobans therefore often pay higher taxes than similar residents of other provinces. Online tax calculators show that an individual earning $20, 000 per year in Manitoba pays $920 per year in taxes more than a counterpart in Alberta and $520 more than in Saskatchewan. By aligning the personal exemption with Saskatchewan or Alberta, Manitoba can do more to boost the purchasing power of the working poor without the job-killing side effects of a minimum wage increase.
The problem with this approach is that the cost of the policy can’t be hidden because it takes the form of reduced government revenue. Politicians prefer policies like boosting the minimum wage where the benefits are apparent, but the costs are hard to recognize and quantify.
The Manitoba government’s desire to boost the purchasing power of the working poor is a worthy objective, but not a cheap one. Almost nothing worth doing is free or easy. Instead of decreeing higher wages and ignoring the costs for business and the unemployed, Manitoba’s government should let the working poor keep more of what they earn and cut spending elsewhere to finance this worthwhile priority.
is Assistant Research Director and Senior Policy Analyst at the Frontier Centre for Public Policy. Ben holds a Masters Degree in Public Policy from the University of Toronto’s School of Public Policy and Governance. Since joining Frontier in 2009, Ben has completed major research papers on a wide variety of policy issues. He has authored papers on early childhood education policy, university tuition policy and Canadian fiscal federalism, among other topics. He is the lead researcher for Frontier’s two major inter-jurisdictional comparisons of healthcare system performance. Ben has co-authored a number of policy studies about environmental policy with Dr. Kenneth Green of the American Enterprise Institute. Ben has presented the findings of his research in dozens of radio and television interviews, and his op-ed commentaries have been published in the National Post as well as in major regional newspapers including the Winnipeg Free Press, the Calgary Herald, The Gazette and the Toronto Sun.