A New Approach to Alberta’s Minimum Wage

Media Appearances, Regulation, Frontier Centre

This month’s increase to Alberta’s minimum wage sparked a heated debate on both sides of the issue. Small-business owners — who have seen the minimum wage rise by 40 per cent in less than three years — worry about their ability to absorb another increase. Labour groups, on the other hand, decry the minimum wage as too low to lift people out of poverty.

Now Calgary’s city council has jumped into the fray, with a committee recommendation for a "living wage" policy that will be debated by council today. The ripple effect of a whopping 56 per cent wage hike for many city employees and their suppliers would be devastating to small-business owners, and ultimately lead to fewer job opportunities for young, inexperienced workers.

The goal of alleviating poverty is an important one, but using the minimum wage as a tool in this battle is a lose-lose strategy.

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.

If minimum wage is a good way to fight poverty, why stop at $13.25? 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 that hiking the 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 per cent increase in minimum wage leads to a 2.5 per cent decrease in employment for teenagers.

A more effective strategy is to improve income tax exemptions for lower income earners, allowing them to keep more of their money.

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?

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."

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

In Alberta’s restaurant industry, more than 80 per cent of minimum wage earners are young people between the ages of 15 and 24, with most still in their teens.

Three quarters (76 per cent) of minimum wage earners work part time, and many also earn tips that push their 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.

Unrealistic minimum wage rates put these opportunities at risk.

Restaurant operators in Alberta are already under pressure from rising labour, energy, food and beverage costs. Average weekly earnings in the food-service industry have jumped 18 per cent since 2005, or nearly twice the provincial average.

The 2008 minimum wage hike alone will cost the average restaurant owner more than $7,000 a year. That’s a big hit for a business that operates on an average pre-tax profit margin of just five per cent, or $45,000 a year.

Alberta needs to consider more flexible, creative and targeted approaches to the minimum wage.

Many jurisdictions have introduced wage differentials for new hires and employees who earn gratuities. This is accomplished not by rolling back wages, but by freezing the minimum wage for these employees when the general minimum wage next increases.

A wage differential recognizes the greater earning potential of tipped employees and the training costs associated with entry-level positions.

After three months of on-the-job training, new hires progress to the general minimum wage, with more opportunities for wage increases as they gain experience. This approach gives employers the financial flexibility to pay higher wages to back-of-house employees who don’t earn tips.

Wage differentials have operated successfully in British Columbia, Ontario, Quebec, Nova Scotia and 37 American states for many years.

Alberta could adopt the Ontario model, where the tip differential applies only to those who serve liquor directly to customers as a regular part of their employment. There are protections to ensure the employee never earns less than the general minimum wage.

Those who oppose wage differentials will argue this approach creates a "second-class" worker.

But in the average full-service restaurant in Alberta, servers earn an estimated $4.12 to $9.27 per hour in tips alone. Add that to their hourly wage and tipped servers are typically earning from $12.52 to $17.67 an hour. Second-class wages? Hardly.

A one-size-fits-all approach to minimum wage will only fuel Alberta’s red-hot wage inflation, further raise the cost of living, and reduce job opportunities for inexperienced workers. Wage differentials are an idea whose time has come.