President Obama’s pledge to increase the national minimum wage has spurred a vigorous debate over how to improve the living standards of low skilled workers. Economists are skeptical of minimum wage increases, pointing out that they increase unemployment. They tend to advocate an earned income tax credit (EITC) as an alternative. Stephen Gordon’s recent piece on the minimum wage for Macleans provides an excellent overview of the literature on the subject. While the case for an EITC instead of a minimum wage is robust, a recent article by Armine Yalnizyan from the Canadian Centre for Policy Alternatives makes a point that is worth addressing:
“It’s often assumed that employers who hire minimum wage workers are small businesses, who would be challenged by even a small increase in labour costs. Surprise: more minimum wage workers are being hired by businesses with more than 500 employees over time. In 1998, big business hired 29.6 per cent of all minimum wage employees in Canada; by 2012 they employed 45.3 per cent. In Ontario, big business accounts for almost half of all minimum wage workers. Raise the minimum wage by just over a dollar an hour and those Tim Horton’s and Canadian Tire jobs aren’t going to disappear.”
Large corporations require a large number of employees. They won’t simply stop hiring if wages are increased. However, large employers could easily reduce their staff levels. Moreover, increased wages would be passed on through higher prices, disproportionately felt by low income consumers.
There are two simple ways for companies to reduce their number of low skilled employees. The first is to simply reduce staff levels, and ask more of existing employees. Anyone who had ever worked in the service sector can envision this. Relying on a smaller pool of minimum wage employees to do the same amount of work is possible, but not particularly good for morale. It isn’t that hard to hire four people to stock shelves, rather than five.
The second is through increased automation. Automation is often the sensible thing to do, but it is often doesn’t make sense unless wages are artificially high. A November 2011 article in the Economist pointed out that this is happening in France as a result of constant labour disruptions. Even McDonalds is experimenting with self-help terminals in France. This is hardly an exclusively European phenomenon. Self-checkout lanes are becoming common at grocery stores, since one employee can oversee a half dozen self-serve terminals. If wages were to increse substantially, the proportion of self-checkouts would increase, and the number of cashiers would decrease. The biggest losers would be students who would lose out on part time employment opportunities, and families who require a second income.
In contrast, an earned income tax credits do not create disincentives to hiring. Moreover, the cost would be paid for through the progressive tax system, rather than through the price of food and groceries, which make up a greater percentage of monthly budgets for low income people. It’s also cheaper to top up the wages of low income workers than to compensate people who are unnecessarily unemployed.
Poverty alleviation is important. Ineffective policies, no matter how well intended, won’t help. No matter how much it is repeated, a minimum wage hike won’t stick it to big business. It will stick it to young people and consumers. Earned income tax credits are a much more sensible solution.