Too Big A Bite

Media Appearances, Poverty, Frontier Centre

Over the past month or so, small business operators across Canada have been rerunning their budgets and adjusting their staffing levels. They’re crunching the numbers to accommodate mandated wage increases ranging from 5% in Newfoundland to more than 9% in Ontario.

These rising wage costs — which are even higher once payroll taxes are added –are the result of hikes to the minimum wage that average 7% across Canada this year. But it doesn’t stop there. Minimum wage increases tend to ratchet up all hourly wages, so that relative pay scales remain intact.

In the restaurant business, where more than 30¢ out of every dollar spent by a customer goes directly to payroll costs — and just about everything else is a fixed cost — wage increases of this magnitude are particularly tough to swallow.

Provincial governments have been facing their own challenges, as they find themselves under growing pressure to raise the minimum wage as part of the fight against poverty. The goal is vitally important, but the game plan needs some serious rethinking.

Nearly half (47%) of Canadians living in poverty are unemployed. For them, a higher minimum wage is inconsequential. Nearly a third (27%) of those living in poverty have completed post-secondary education. A higher minimum wage won’t help them find employment in their chosen fields. Nor will a higher minimum wage assist the more than half a million Canadian seniors living in poverty.

Several researchers have argued that increasing the minimum wage too much, too fast actually worsens the situation for those living in poverty by creating a ripple effect throughout the economy. As other wages rise to keep pace with a higher minimum wage, the cost of basic goods and services rises as well. At the same time, employers in labour-intensive industries are left with little choice but to control costs by cutting back on their staffing levels. Entry-level job opportunities are typically the first casualty.

Those who feel the minimum wage is a good way to fight poverty must ask themselves, why stop at $10 or $11? Why not impose a $15 or $20 minimum wage? Obviously this would create a lot of potential employees, but far fewer jobs and far more expensive goods and services.

A 2006 study for the government of Canada concluded a minimum wage is an "exceedingly blunt instrument for dealing with poverty, and may actually have a perverse effect, exacerbating poverty." Other studies have found that a 10% increase in minimum wage leads to a 2.5% decrease in employment for teenagers.

Reasonable minimum wage rates serve an important purpose by allowing students and other entry-level employees to gain a foothold in the world of work.

The vast majority of minimum wage earners are young, first-time employees who voluntarily work part-time and do not rely on their minimum wage income for their livelihoods.

In the restaurant industry, close to 80% of minimum wage earners are young people between the ages of 15 and 24, with most still in their teens. Nearly three quarters (74%) of minimum wage earners work part-time, and many also earn tips that push their hourly income well above minimum wage.

Far from living in poverty, these minimum wage earners are more than likely living at home and working part-time to gain job experience, work skills, extra income and savings for further education.

Ironically, a steep minimum wage increase could put the future of many of these students at risk. Studies have shown that school enrollment rates are lower when minimum wage rates are high. In tight labour markets, as is the case in many regions of Canada, a high minimum wage can entice teenagers to quit school early only to find themselves without skills and education when labour market conditions change.

In addition, employers in labour-intensive businesses such as restaurants will have no choice but to cut back on hours and jobs because they simply aren’t able to absorb the cost increase. The vast majority of Canadian restaurants are locally owned and operated small businesses, running on an average pretax profit margin of less than 4%.

Some argue that restaurateurs could raise their menu prices to offset the higher wages. In a fiercely competitive industry, with price-sensitive consumers, this is rarely an option. When prices go up, consumers tend to divert their spending to the grocery store, where more and more meals and beverages compete directly with restaurant items –and for the most part they are available tax free, unlike restaurant meals.

Clearly, government cannot generate prosperity through minimum wage legislation. A January 2008 report from the Frontier Centre for Public Policy examined the question: Which best helps the poor: minimum wages, tax credits or tax exemptions?

The author, David Pankratz, summarizes his findings as follows: "Our comparison makes it abundantly clear that we can best express the sincerity of our intentions to help the poor by expanding the value of their basic exemption from income taxes. … In fact, the numbers show that increased exemptions work spectacularly better than minimum wages or tax credits in meeting the goal of improved incomes."

He adds that "higher minimum wages create distortions in the labour market that have their own harmful effects. The worst of these is forbidding the least skilled from sharing in the dignity of work."

Ottawa and several provinces have made recent changes to the tax system to allow low-income earners to keep more of their earnings, but more needs to be done. Those who are pressuring governments for higher minimum wages owe it to themselves and their constituents to take a much closer look at this issue.