Alberta’s $15 Minimum Wage

By Ian Hussey and Jack Mintz

 

Ian Hussey anticipates benefits.

Alberta’s minimum wage was tied for Canada’s lowest when Rachel Notley became premier. On October 1 it will rise to $15 an hour—a 47 per cent hike over three years.

In 2015 the Canadian Federation of Independent Business claimed that Alberta’s increase would cost the province “between 53,500 and 195,000 jobs.” In other words, CFIB believed that as many as two-thirds of the almost 300,000 Alberta workers making less than $15 an hour could lose their jobs. In 2017 the C.D. Howe Institute claimed the increase to $15 by 2018 “could lead to the loss of roughly 25,000 jobs.”

History, however, doesn’t back up critics’ sky-is-falling claims. In 2009 Hristos Doucouliagos and T.D. Stanley published a meta-study of 64 US minimum wage studies, 1972–2007. They concluded that minimum wage increases have no or near-zero effect on employment. In 2016, with the provincial economy still in recession, Alberta’s accommodation and food service industries, where low-wage jobs are concentrated, added 6,200 jobs. In 2017 this sector added a further 1,500. These were created despite minimum wage increasing 33 per cent from 2015 to 2017.

The main reason doom-and-gloom predictions fail to materialize is because critics assume employment effects for teenagers also apply to workers over age 20. In reality, minimum-wage increases tend to result in a small percentage of teens losing their jobs, while losses for adult workers are effectively zero. This is because the vast majority of minimum-wage workers are necessary to businesses, and if employers must cut, they lay off their least experienced employees.

More than 70 per cent of Albertans making less than $15 an hour, however, are not teenagers. In fact, 40 per cent are parents, and over 18,000 are single parents.

There are, in fact, many benefits to raising the minimum wage. It stimulates the local economy, because low-income earners spend most of their income, and chiefly in their community. Overall consumer spending power rises, as does the amount of money circulating in our economy. Meanwhile, a $15 minimum wage significantly boosts the income of low-wage workers as a group, reduces poverty and slows down widening income inequality, especially as 60 per cent of Alberta workers making less than $15 an hour are women.

Some claim our economy, especially the hospitality industry, is too weak right now to support higher wages. But ATB Financial in September 2017 reported that restaurant and bar receipts in Alberta are at an all-time high. Higher minimum wages can even save taxpayers money. People on low incomes rely more on social services. As Finance Minister Joe Ceci has said, “There’s almost a kind of subsidy going to private businesses through the charitable sector to keep people whole.”

All in all, minimum-wage hikes don’t hurt our economy; they help more working people share in the province’s prosperity.

Jack Mintz expects layoffs.

Sometimes it is helpful to understand the impact of a policy like minimum wage hikes with an anecdote rather than to survey countless economic studies. My daughter, a social worker in Toronto, assists vulnerable youth. A troubled client who recently escaped homelessness achieved success with a minimum wage job that supports her basic standard of living. But now that Ontario has announced a 30 per cent increase in minimum wages by 2019, this client’s hours have been cut back and she faces homelessness again.

The point of this story is to illustrate that minimum wages are a very poor way to target poverty. When wages are forced up, someone has to pay. Maybe business owners can absorb the higher costs through lower profits, but this is unrealistic since increased wage costs are often well in excess of thin profit margins. In a good economy, businesses could pass on the cost of increased wages through consumer prices. Governments should remember, however, that higher prices are no different than creating a regressive sales tax that hits lower-income households more harshly.

If price pressures due to competition make it difficult to pass on costs through higher prices, businesses will instead cut back benefits, since minimum wage laws do not apply here. Layoffs or hour reductions may also happen. And over time businesses will adopt more automation when wages rise.

Minimum wage increases also target more than just the working poor. While many at minimum wage will be better off, some of the secondary workers who benefit from higher wages come from middle income and affluent households, such as university students.

And what about those economic studies and layoffs? As the Bank of Canada noted in a recent comprehensive survey, some harm comes through worker layoffs. The Bank predicts 30,000 to 140,000 job losses due to the recent Ontario hikes—this would be 6 per cent to 28 per cent of workers at the minimum wage level. Given the terrible economy, the Alberta wage hikes after 2015 were poorly timed, aggravating an already bad economy. Businesses already feeling the pinch are more likely to lay off workers in a bad economy.

Is there a better policy to help the working poor? Absolutely. Many economists would argue for wage subsidies directed at low-income workers. These policies can be targeted truly at the working poor without helping those who don’t need it. They would also create incentives to work as well as avoid any layoffs at all.

How to pay for subsidies? If the money can’t be found in the budget, a small Alberta sales tax could be imposed on top of the federal GST. This is no different than what happens anyway when firms pass on costs through higher consumer prices. But at least this way no worker is fired and we don’t end up helping some who don’t need it.

Ian Hussey responds to Jack Mintz

For decades the business lobby has been making many of the same arguments that Mr. Mintz presents against any and all minimum wage increases, however small. It’s never the right time for an increase, it seems, and the last thing businesses “feeling the pinch” need is a “poorly timed” initiative to put more money in the pockets of the lowest-paid workers in the economy. Never mind that Alberta’s 2017 economic growth of 4.5 per cent led the country, and our 2018 growth forecast of 2.8 per cent is among the leading provinces.

The problem for such critics is that their arguments are largely divorced from the data and the bulk of the last 20 years of economic research into the impacts of minimum wage increases.

To make matters worse, Mr. Mintz misleads when he says the Bank of Canada report on Ontario’s minimum wage hike concludes the increase will lead to layoffs. The report actually says the wage increase will result in slower than expected job growth. The report also concludes the wage hike will result in net gains for workers. Perhaps that’s why in a 2017 open letter, 53 economists endorsed Ontario’s move to $15.

Mr. Mintz also argues that raising the minimum wage is a “poor way to target poverty.” The reality is that past minimum wage increases had no impact on poverty rates because they were too small, keeping full-time earnings below the poverty line. For example, in 2013 Alberta’s minimum wage went up 20 cents to $9.95. Earning that wage for 35 hours a week for 52 weeks, a worker’s annual pre-tax income was $18,109. Canada’s 2013 after tax Low Income Cut-Off (the poverty line) for a single person with no children living in a city of at least 500,000 people was $19,744.

The 2016 poverty line (the latest one) for the same person now is $20,675. At $15 an hour, a full-time worker’s annual pre-tax income is $27,300, so the $15 wage raises them above the poverty line. The worker sees a sizeable net gain in income, since they’ll pay little income tax (Alberta’s 2017 personal income tax exemption was $18,690).

“In reality, 74 per cent of Alberta low-wage workers aren’t teens.”

Is Alberta’s minimum wage increase causing economy-wide inflation, as Mr. Mintz suggests? Absolutely not; inflation in Alberta is driven by the pace of oil sands development, not long-overdue minimum wage hikes. The inflation-adjusted average provincial minimum wage across Canada only went up a penny from 1975 to 2013. In 2019 a $15 wage, when adjusted for inflation, will only be about a dollar more than the 1977 minimum wage.

Is a $15 minimum wage too high for Alberta? Economists generally agree that the minimum wage should be between 40 per cent and 60 per cent of a province’s average wage. Alberta’s February 2018 average wage was $30.88, so our minimum wage should be between $12.35 and $18.53, meaning $15 is right in the middle of the range suggested by economists.

Mr. Mintz says competition may make it hard for businesses to pass on costs to customers, so layoffs and increased automation may occur. But every low-wage employer faces the same wage increases, so none are at a competitive disadvantage in this sense, and in 2016 the government announced the three remaining pay bumps on the path to $15 specifically so that business owners could prepare by adjusting their business plans. Contrary to the catastrophic claims of impending job losses when the minimum wage increase was announced, 2016 and 2017 saw Alberta’s economy add 7,700 jobs in food service and accommodation.

Automation isn’t new or dependent on wage increases. Automation has affected and will continue to affect how we work, but that doesn’t mean a full-time worker should be paid below the poverty line. In 2016 some McDonald’s locations in Alberta introduced self-serve kiosks, but also hired more workers to interact with customers, illustrating that automation doesn’t always mean fewer jobs.

Mr. Mintz’s view that some minimum wage earners don’t need a raise is another common refrain used by minimum wage opponents. This is based on the faulty stereotype of the minimum wage worker as a teen who works part-time, lives with their parents, and is earning extra spending money working for a small business. In reality, 74 per cent of Alberta low-wage workers aren’t teens; 62 per cent don’t live at home with their parents; and 58 per cent work for big businesses with 100-plus employees.

Only 18 per cent of Alberta workers making less than $15 an hour who live in a two-income household have a spouse making a higher wage. Almost twice as many low-wage workers are the head of their household than are their household’s second income earner. These second incomes are mostly earned by women, meaning that minimum wage increases are an important means to narrow Alberta’s gender income gap, the largest in Canada.

As for the claim that university students making minimum wage don’t need a pay raise, the average tuition for Alberta’s post-secondary institutions increased almost 500 per cent from 1992 to 2015. Very few students, whether they live at home or not, will have loads of disposable income even after the minimum wage is increased to $15.

In contrast to the clear advantages of setting a minimum wage at a level that allows a full-time worker to climb above the poverty line, Mr. Mintz’s alternative proposal that Alberta introduce a provincial sales tax to subsidize low-wage employers would dampen purchasing power and incentivize employers to pay low wages to get the government top-up.

Jack Mintz responds to Ian Hussey

Ian Hussey’s argument that minimum wage policies are good for the economy raises a critical question in my mind. Is there an optimal minimum wage?

Suppose that minimum wages have no negative impact on employment, which suggests that business demand for workers is impervious to the wage rate. In that case, why not simply raise the minimum wage to $50 per hour? No one would lose a job. All workers could then command a minimal annual salary of roughly $100,000 per year and no worker would be impoverished.

Obviously this is absurd. Businesses would not be able to hire all employees at this new cost. They could try to reduce hours worked or improve efficiency, but this is limited. They could fire workers and contract instead, but inevitably businesses would have to raise consumer prices to cover such high wage costs. Higher prices would result in falling demand and a loss in market share to imports from other jurisdictions. To survive, businesses would have to automate practices to save wage costs, lay off their least-skilled workers or simply shut down. The economy would stop growing and employment would be suppressed.

No one, I’m sure, would advocate for such a high minimum wage. So what, then, is the optimal minimum wage? In recent years, $15 per hour has been pegged as the “living wage,” about $30,000 per year. This would certainly pull most working poor out of poverty. In fact, such an income would be higher than the low-income-cut-off measure of poverty in Alberta.

Do we even need minimum wages at all? Three arguments can be made that minimum wages are not needed.

First, minimum wages have some negative impact on the economy even if not through employment effects. The meta-analysis study by Doucouliago and Stanley found that the average impact of minimum wages is to reduce employment demand (a 1 per cent increase in the minimum wage would reduce employment by 0.19 per cent), with most studies grouping around zero impacts. A similar UK study did not come to this conclusion. Its authors argue selection bias by editors overestimates negative results. But there are limitations inherent with meta-analysis studies—they can be biased against more exacting studies with stringent modelling and larger data sets.

“Not all Albertans working at minimum wage are necessarily poor.”

Most research erroneously focuses only on employment impacts, yet minimum wages affect the economy through hours worked, greater use of skilled versus unskilled labour, higher consumer prices, benefits and automation. These issues have not been studied sufficiently to come to a conclusion about the process with which minimum wages will affect the economy—but some mechanism must operate to accommodate higher wage costs.

Second, we should remember that not all those working at minimum wage are necessarily poor. A Statistics Canada study estimated that only 1.8 per cent of Albertans in 2013 were at the minimum wage. Is this a badge of dishonour for the province? Alberta was the fastest growing economy and had the highest incomes in Canada at that time.

Casual empiricism might suggest that lower minimum wages have had the perverse result of higher salaries and employment, as businesses find less-regulated labour markets more attractive for investment. I wouldn’t push this point without careful study, since many factors influence growth besides labour regulations. However, the Bank of Canada study I referred to previously takes into account larger economic impact on trade and substitution of capital for labour.

Of those who were at the minimum wage, almost half are teenagers, three-fifths are part-time workers, 60 per cent work in retail trade and food and accommodation and 70 per cent have completed high school or at least some post-secondary education. Not all of these workers live in poverty, since they could come from relatively affluent households, which is why minimum wage policies are a poor mechanism to address poverty.

Third, governments already provide many social safety net programs, including social assistance and employment programs that make it difficult for anyone’s income to drop below a certain level.

A superior social policy to minimum wage would be income subsidies. For example, the US earned-income credit is provided as a share of employment income for those who annually earn less than $15,010 (a single person) or as high as $53,930 (for joint filers with more than three children). The credit is targeted to low-income persons or families by phasing out the support when income is above the limit.

Instead of raising the provincial minimum wage from $10 to $15, the government of Alberta could have introduced an earned income credit of equal value (50 per cent of employment income) phased out for incomes above $15,000 per person (double for family income). It would apply to those working for a wage or on contract. A back of the envelope calculation suggests a cost of roughly $300-million that could easily be covered by budgetary savings or taxes (such as a harmonized Alberta sales tax that would raise consumer prices by 0.3 percentage points, about the same impact on consumer prices as a minimum wage hike). No one loses a job and the benefit would be targeted to those who are truly poor.

Overall only one conclusion remains: The optimal minimum wage is zero. It is far better to provide wage subsidies that generally encourage rather than discourage work.

Ian Hussey is the Research Manager at the University of Alberta-based Parkland Institute. Jack Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy.

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