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Finlayson: Higher minimum wages not the best answer to reducing poverty (Troy Media and The Province)

Proposals to boost the minimum wage have been drawing attention on both sides of the Canada-U.S. border.

In January, U.S. President Barack Obama called for lifting the U.S. federal minimum wage to $10.10 an hour. Since 2011, several American states and cities have increased minimum wages in their jurisdictions.

In Canada, four provinces are raising their minimum wages in 2014 — Ontario, Quebec, Nova Scotia and Newfoundland. Ontario is taking the biggest step, hiking the minimum wage to $11 an hour and indexing it to the Consumer Price Index going forward.

Are higher statutory minimum wages an effective way to improve the economic well-being of low- to moderate-income workers and families? Will some businesses respond to escalating minimum wages by shedding jobs? These questions have been extensively studied by academic economists in the past decade. Overall, the research yields mixed results.

Clearly, a rise in the minimum wage is positive for the lowest-paid employees who experience no changes in their hours, benefits or working conditions after the fact. Other workers, whose wages are slightly above the current minimum, are also likely to enjoy a pay bump. But basic economic logic and intuition suggest that any increase in labour costs, absent offsetting gains in productivity or additional business revenues, will prompt some employers to lay off workers, reduce hours or find other ways to economize on the use of labour, for example, by investing in labour-saving technology. It follows that at least 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 labour costs to their customers via higher prices for the goods or services they sell.

Most economists who have studied the topic agree that small, periodic adjustments to the minimum wage don’t have much impact on the demand for labour. But larger increases are another matter.

According to the Congressional Budget Office (CBO), which is the non-partisan research arm of the U.S. Congress, Obama’s proposal to push the federal minimum wage to $10.10 an hour from $7.25 could cost up to one million jobs — although the CBO’s central estimate is closer to 500,000 lost jobs. The good news is that many millions more low-wage workers would see higher earnings under Obama’s policy and the total income accruing to U.S. workers would undoubtedly rise.

However, the CBO says that only one-fifth of the beneficiaries of the president’s plan live in households with the lowest incomes. And a higher minimum wage can make it harder for low-skilled and entry-level workers to gain a foothold in the job market.

This suggests that a higher minimum wage may not be the best instrument to address poverty or the incidence of low-paid employment. Still, it is one way to improve incomes for workers who are paid at or near the statutory minimum. For that reason alone it remains an appealing option in the eyes of some economists and policy analysts.

There is no reason to believe that the effects of a rising minimum wage on the demand for labour will be uniform across jurisdictions or time periods; much depends on the context. If the minimum wage has been frozen for many years, a modestly higher one is unlikely to result in many lost jobs. If the minimum wage is already set at a relatively high level — say at 55 or 60 per cent of the average industrial wage — then raising it further may create strong incentives for employers to alter their business practices to reduce the use of labour.

One alternative to higher minimum wages is an earned income tax credit that uses the tax system to increase the economic benefits of employment for lower-income workers. Experience in the U.S. has shown that an EITC can be helpful in reducing poverty and providing a minimally acceptable income to families with low-wage workers. The U.S. government now spends twice as much on the EITC as it does on welfare programs.

The Canadian government’s Working Income Tax Benefit is a scaled-back version of the American EITC; the Canada Revenue Agency’s website describes it as “a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families …” It is time to consider expanding the WTIB to increase the economic returns from employment for relatively low-paid workers.

As posted online