The provincial government recently announced that the minimum wage will rise from $10 to $10.30 at the end of the year. This will be welcome news to the roughly 1 in 13 New Brunswickers currently working for the minimum wage.
Naturally, this was unwelcome news to the Canadian Federation of Independent Business, one of the right-wing lobby groups that always oppose any increase in the minimum wage, no matter how small. It claimed that the increase may “force business owners to reduce hours or lay off employees.”
The current $10 minimum wage dates from April 2012. The extra 30 cents/hour allows the minimum wage to keep pace with inflation, restoring its purchasing power to what it was two and a half years ago. In real terms, the minimum wage remains lower than it was in 1977, when it was about $10.35 in today’s dollars.
As part of its announcement, the government also promised to raise the minimum wage to $11 an hour by 2017 and to increase it by the rate of inflation after that. This will allow the minimum wage to remain at roughly half the average wage in the province.
Ten years ago, the minimum wage was just 40 percent of the average wage. Adjusted for inflation, it has gone from $7.35/hour to $10/hour. This has helped to reduce wage inequality and inequality in family incomes while contributing significantly to the incomes of those with the lowest wages.
Although reducing poverty is not the primary goal of a minimum wage, minimum wage workers are disproportionately represented among men living alone and among single mothers. Because those individuals are the sole income earners in their households, if they receive the minimum wage, its level is critical if they are to escape poverty.
Indexing the minimum wage to inflation also follows the approach now followed by most provincial governments. If the Bank of Canada meets its 2 percent inflation target, the minimum wage will have to increase each year by about 20 cents to keep its purchasing power constant.
The danger of layoffs and reduced work hours are always raised by opponents of minimum wages, but studies by reputable economists do not bear this out. They typically find that an increase in the minimum wage is most likely to result in less employment for some teenagers (whether through lower work hours or reduced employment opportunities). But those effects are small enough that they are outweighed by the increased wages going to those teenagers who are employed. The net result is that an increase in the minimum wage raises the total incomes of teenagers as a whole. Employment effects for older workers are negligible.
A recent Canadian Centre for Policy Alternatives study, ‘Dispelling Minimum Wage Mythology,’ points out that employment levels, even for workers most likely to work for the minimum wage, are overwhelmingly determined by the state of the overall economy. Minimum wage regulations are of little importance in influencing employment.
When a minimum wage law raises wages above what they would otherwise be, it transfers income to the minimum wage work force and out of the pockets of the business owners who pay their wages. It is this struggle over income shares which makes minimum wages such a politically contentious issue.
Can this transfer from business owners to low-wage employees be justified? Aren’t wages just set in ‘competitive’ labour markets where people get paid what they are worth?
Well, no. Employers typically have some power to lower wages in the labour market compared to what they would be in an idealized competitive market. As a result, minimum wages help to offset employers’ power to keep wages low.
For what seem to be relatively small employment effects for most workers, minimum wages counteract employer power, ensure a decent wage floor for the lowest paid, reduce wage and family income inequality and contribute to reducing poverty for some. It’s little wonder that minimum wages have such strong public support.
Rod Hill is a Professor of Economics in the Faculty of Business at the University of New Brunswick, Saint John campus, and a Research Associate with the Canadian Centre for Policy Alternatives – Nova Scotia.
For more information:
Pierre Brochu and David A. Green (2014). ‘Minimum wages: the effects on employment and labour-force turnover,’ VOX, 22 January.