The benefits of a lower minimum wage

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As Robert Samuelson wrote earlier this year in the Washington Post, “The poor are not poor because the rich are rich.”

(Stock image)

By Ian Lee

Last year, the provincial government appointed the Ontario Minimum Wage Advisory Panel to undertake research and hearings into the minimum wage.

The group uncovered several critically important findings:

Retail employs only 12 per cent of all workers, but the sector accounts for almost 31 per cent of minimum wage workers;

Although accommodations and food services account for 6.7 per cent of total employment, those sectors account for 24.7 per cent of minimum wage jobs;

While youth between the ages of 15 and 19 represent five per cent of the workforce, they hold 42 per cent of minimum wage jobs. Those between the ages of 20 and 24 are also overrepresented, accounting for 10 per cent of the workforce but 20 per cent of all minimum wage jobs;

Only 12 per cent of all minimum wage workers are below the poverty line.

What does this tell us? Minimum wage jobs are overwhelmingly held by those between the ages of 15 and 25 who work in the retail, accommodations and food services industries.

Moreover, the panel found “in the Canadian context, researchers have generally found an adverse employment effect of raising minimum wages, especially for younger workers.”

Contrary to claims of anti-poverty advocates, minimum wage jobs should be understood as the essential and necessary path to the world of employment and labour markets.

A higher minimum wage places an additional cost on companies considering the hiring of inexperienced young workers and gives them an incentive to adopt labour-saving technologies such as automated checkout counters.

Instead, policy-makers should encourage companies to hire these people and give them valuable work experience by keeping minimum wages low.

The commission’s finding that 88 per cent of minimum wage workers live above the poverty line shows that minimum wage is not the issue. Or in the words of University of British Columbia economics professor Kevin Milligan, poverty is an income problem, not a pricing problem in labour markets.

Indeed, large numbers of those in poverty are unemployed for extended periods of time. When one examines the bottom 20 per cent of earners, one quickly sees a correlation with low levels of education.

Yet anti-poverty activists have adopted an agenda that involves a smorgasbord of market price interventions from subsidized housing, to tax breaks and subsidies for goods deemed to be necessities, to increases in the minimum wage.

In fact, the real problem is that low-income households have low incomes.

An example will illustrate this. In the 1960s across western countries, the largest numbers of people in poverty were seniors. However, instead of constructing special subsidized housing for the elderly or creating special stores where seniors could buy necessities at subsidized prices, governments decided to ensure that the elderly would receive a basic income that the recipients could spend as they saw fit.

In Canada, this became known the Old Age Pension and the Guaranteed Income Supplement. This helped reduce Canada’s elderly poverty rate from nearly 37 per cent in 1976 to 12.3 per cent in 2010, according to Statistics Canada.

Granted, the federal and provincial governments offer income redistribution programs such as the GST/HST rebate for low-income Canadians and the Canadian child tax benefit, both of which target low- and modest-income families.

But the big issue is that in the current knowledge-based economy, more than 30 per cent of those between the ages of 25 and 44 lack a post-secondary education – an essential ingredient to obtaining a good job today.

Targeting people who lack a post-secondary education is a far more effective way of addressing poverty than mandating that companies pay their youngest, least-experienced workers more.

Increasing the minimum wage is analogous to whistling loudly as one walks by a cemetery in order to frighten off spirits.

Ian Lee is a professor at the Sprott School of Business at Carleton University. He appears regularly on CBC’s Power and Politics in the On the Money segment.

Organizations: Ontario Minimum Wage Advisory Panel, University of British Columbia, Statistics Canada GST/HST Sprott School of Business Carleton University CBC

Geographic location: Canada

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  • jayme
    March 26, 2014 - 11:57

    Bob The issue in Ontario is there is a massive demand for skilled trades but people are going itno the arts or teachers college.

  • Bob Izumi
    March 25, 2014 - 18:55

    The most shameful thing about Ian's argument is it doesn't address the facts - that more than 40% of people in the service sector are greater than 25 year old. They need to feed their families and our shrinking job sectors that used to employ lower skilled folks don't exist anymore. A case for universal post-secondary education? Not everybody can hack university however, and obviously we still need people to flip burgers and sell us clothes - we just don't like to pay them enough to live on. That's inequality (and I would argue, an immoral response (a classic 'Ive got mine - too bad for you response suitable for 3 year olds, not humane, well rounded adults). And Ian, its not like the data is hard to find, I googled minimum wage workers ontario and got clear data. http://www.wellesleyinstitute.com/economics/income-inequality-economics/a-closer-look-at-who-is-making-minimum-wage-in-ontario/ It just looks like Ian Lee started with his premise and low-and-behold got his answer he was looking for instead of doing his research. Shame.

  • Sprott Alum
    March 13, 2014 - 15:13

    Wrong. If everyone went to Med School would everyone be a doctor? No, the demand simply wouldn't be there. We need people to work in retail, food service and hospitality positions and they should be paid a living wage. (And while we're at it, those that earn a lot, should earn less or be taxed more.) Equality is the key; Scandinavian countries are proof of that.

    • Kevin
      March 14, 2014 - 09:29

      Equality is the key, yes. However what does it mean to be equal? Is it simply everyone makes the same money? So, if someone has a lot of responsibility and/or risk involved in their work is it fair that they get paid the same as someone who flips burgers for a living? Frankly, if I knew that I was only going to make that much then what incentive is there for me to get into the high tech world? In my field, if I produce twice as much as the guy sitting next to me, is it fair if I get paid exactly the same? As a university graduate, you expect a higher wage, and yet for things to be completely equal you'd get paid no more than you did as a student working in retail to pay your tuition. Have you ever been to a Scandanavian country? Last time I went back in the late '80s I paid $15 US for a cheese burger, fries and a beer at restaurant that would be comparable to a Rockin' Johnnies here in Canada.