By Jock Finlayson

Proposals to increase the minimum wage have been gaining political traction on both sides of the Canada-U.S. border.  In January 2014, President Obama called for lifting the U.S. federal minimum wage to $10.10 an hour. Since 2011 a number of American states and cities have increased the minimum wages applicable in their jurisdictions.

In Canada, the Ontario government recently raised the minimum wage in that province to $11.00 an hour, and announced a plan to index it to the Consumer Price Index going forward. Quebec intends to nudge its minimum wage higher later this year.

Are higher statutory minimum wages an effective way to improve the economic well-being of low to moderate income workers? Do they reduce the incidence of poverty?

Will some businesses respond to an escalating government-imposed minimum wage by shedding jobs? These questions have been extensively studied by academic economists in the past decade. Overall, the research yields mixed results.

Obvious Pros and Cons
Clearly, a rise in the minimum wage is positive for the lowest paid workers who experience no change in their hours, benefits, or working conditions after the fact. Other workers, whose wages are slightly above the current minimum, are also likely to see a bump in pay if the government legislates a higher level.

However, basic economic logic and intuition suggest that any increase in labour compensation costs, in the absence of compensating advances in productivity, will cause some employers to lay off workers, reduce hours, and/or find other ways to economize on the use of labour (for example, by outsourcing or investing in labour-saving technology).

It follows that some businesses affected by a higher minimum wage can be expected to trim their payrolls and adjust their hiring practices. Many will also seek to pass on any increase in costs to their customers by charging higher prices for the goods or services they sell.

Big Hikes Court Big Risk
Most economists who have studied the topic agree that small, periodic adjustments to the minimum wage are unlikely to have a significant impact on the demand for labour. However, big minimum wage hikes are another matter.

According to the Congressional Budget Office (CBO), which is the research arm for the U.S. Congress, President Obama’s proposal to push the minimum wage from $7.25 to $10.10 an hour could cost up to 500,000 jobs. Many low-wage U.S. workers would enjoy higher earnings under the President’s policy. However, the CBO estimates that only one-fifth of these beneficiaries live in households with the lowest overall incomes.

This tells us that the minimum wage isn’t necessarily a well-targeted instrument to tackle poverty, since many low-wage workers aren’t members of very low-income families. Still, a higher minimum wage is one tool to raise incomes for workers who are paid at or near the statutory minimum. For that reason alone it remains an attractive option in the eyes of some politicians, economists and policy analysts.

A Catalyst for Job Cuts
There is little reason to believe that the effects of a higher minimum wage on the pattern of labour demand will be uniform across jurisdictions or time periods—much depends on the context. If the minimum wage has been frozen for many years, then imposing a modestly higher one probably wouldn’t result in large-scale job losses. If the minimum wage is already set at a relatively high level – say at 60 per cent of the average industrial wage – then increasing it further may create strong incentives for many employers to alter their business practices to economize on the use of labour.

In British Columbia, the current $10.25 minimum wage amounts to 42 per cent of the average industrial wage. Pushing the minimum to half of the average wage would take it to roughly $12 an hour. Based on the available research, it’s difficult to say how many jobs would be eliminated by such a policy, although surely there would be some job losses in sectors like accommodations, restaurants, retail and personal services.  On the other hand, low paid employees in these industries who are able to hold on to their jobs (and hours) would benefit from a higher minimum wage.

Small Steps Set Smart Pace
Regardless of where policymakers choose to set the statutory minimum wage, there is an argument for adjusting it in small steps on a regular basis, perhaps in line with changes in the cost of living, rather than keeping it frozen for many years, as British Columbia did between 2001 to 2010.

Experience shows that when the minimum wage is fixed for long stretches of time, political pressure eventually builds to legislate big increases—and it is these that produce the most serious adjustment problems for businesses that employ lots of relatively low-paid workers.

Jock Finlayson is the executive vice-president of the Business Council of BC.

(PeopleTalk Spring 2014)