Arguments for and against a minimum wage

With September now upon us, more than just the leaves are changing colour.

Effective Sept. 1, the lowest wage a worker in Alberta can receive is $9.40 per hour, or $9.05 for servers of alcohol (where tips account for a large share of total earnings). The new minimum wage rate – an increase of 6.8% for general workers and a 2.8% increase for liquor servers – represents the first increase in the province since April 2009. The change will impact about 20,000 people, less than 1% of the current job market of 2.1 million workers. Even with the increase, Alberta’s minimum wage is still the lowest in the country.

Minimum wages are a source of constant debate, usually between free-market economists and social advocates. Often that debate gets quite heated.

Do we really even need a minimum wage?

But the question is worth asking: do we need a minimum wage at all?

On one side of the debate are the market libertarian economists who believe there should be no minimum wage. Higher payrolls add cost to employers (especially small business owners who hire disproportionately more low wage earners) and eventually result in fewer overall jobs. If a small restaurant owner, for example, has to increase the wage she pays her staff, she will either have to increase the price on the menu (which she may not be able to do without losing customers), or lay off some staff. In the worst-case scenario, she may close up shop.

The free-market economists argue that in an open and competitive economy, workers are free to find work elsewhere if they are dissatisfied with the wages they receive. The logic of this line of reasoning, however, depends on two key concepts: 1) workers know about higher wages elsewhere (what economists call “perfect information”) and 2) it is easy and costless for workers to move to jobs elsewhere (what economists call “perfect labour mobility”). Perfect information and perfect labour mobility are nice in theory, but unfortunately neither exists in the real world. Workers do not always know what wages they could receive elsewhere, and there are real costs to commuting to a job across town, or moving across the country. These costs are especially onerous on many individuals who may be earning low wages in the first place.

To offset the information gaps and barriers to changing jobs, the government imposes a minimum wage to ensure that no worker is forced to work for unacceptably low wages.

Social advocates, on the other hand, believe strongly in minimum wages. In fact, many think that the current minimum wage is still far too low and that the government should impose a ‘minimum living wage’. Depending on the calculation, that would be around $12 or $13 an hour, reflecting that Alberta is a costly place in which to live. This is particularly true for workers who may be single parents with childcare costs.

It may be very well meaning, but the concept of imposing a minimum living wage of $12 an hour doesn’t make sense either. According to a Sept. 1st radio interview with Mark von Schellwitz, a vice president with the Canadian Restaurant and Foodservices Association (CRFA), about 80% of workers earning the minimum wage in the food industry do so voluntarily – that is, they are students or second-income earners in a family and generally have another income support system within their household. (Think about a high school student working part-time at the mall, or a spouse in a two-income home working at a local coffee shop to supplement household income).

But that still leaves 20% of minimum wage earners in the food industry entirely dependent on their wages to live, often without support from other family members. Without question, that is a serious problem. If the CRFA’s figures are accurate, approximately 4,000 Albertans (20% of 20,000 workers) are completely dependent on $9.40 per hour. That’s not much, especially in Calgary or Edmonton.

Raising the minimum wage to a ‘living minimum wage’, however, is the wrong policy tool to deal with poverty. It is the proverbial sledgehammer to kill a fly. Imposing a higher cost on employers for all of their minimum wage workers – including the many thousands of teenagers who are just looking for some work experience and shopping money – is the wrong approach. Other ways are needed to identify and assist Alberta workers living in poverty rather than heaping the entire cost on the backs of small business owners.

As in many things in life, balance is needed. A minimum wage is certainly required to protect workers who cannot be expected to know about other higher-paying jobs, or to simply relocate to take those jobs. And at the same time, the minimum wage cannot be expected to eradicate poverty; it’s too cumbersome a policy tool and would impose an unfair burden on small businesses.

The Government of Alberta has probably struck a good balance by raising the minimum wage this fall.

Todd Hirsch

Senior economist with ATB Financial

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