Tuesday, May 25, 2010

Minimum Wage Review

Alberta's Standing Committee on the Economy is requesting submissions regarding Alberta's minimum wage policy. This follows Alberta's decision not to increase the minimum wage by 12 cents an hour this spring. Here is my submission:

Naresh Bhardwaj, MLA
Chair, Standing Committee on the Economy
801 Legislature Annex, 9718 107th Street
Edmonton, AB T5K1E4

Dear Chairman Bhardwaj:

Thank you for the opportunity to comment upon Alberta’s minimum wage policy.

Why have a minimum wage?
Minimum wage laws stipulate the least compensation society deems to be acceptable for employment. These laws have been developed because employers seek to minimize wages as one way to maximize profitability. Workers must engage in employment in order to afford the necessities of life. This need for income gives employers a powerful lever (sometimes called the “whip of hunger”) that employers use to strike a wage-rate bargain that is maximally advantageous for the employer.

Practically, this plays out as follows. When there are more workers than jobs (the usual case) employers pit workers (who must have a job) against one another to drive down wages. For example, an employer may offer one worker $5.00 an hour. If that worker accepts (because she needs to feed her children), the employer is then able to say to another worker: “Jane will work for $5. If you want the job instead, you need to work for $4.50.”

The historical result of this dynamic has been exploitative wages (often most disadvantaging women, minorities and young persons), grinding poverty and social instability. A legislated minimum wage helps protect the most vulnerable workers from this scenario by setting a wage floor below which no employer may go.

Alberta’s minimum wage
Alberta’s minimum wage is $8.80 an hour. Assuming a 40-hour workweek for 50 weeks per year, Alberta’s minimum wage means an annual gross income of approximately $18,000 (when you factor in vacation pay). Alberta does not have a clear statement about the purpose of its minimum wage policy or the criteria upon which the minimum wage is set. But let’s assume that underlying purpose of stipulating a minimum wage is to ensure workers can earn enough money to get by with from month to month.

A minimum-wage worker has about $1500 per month (before taxes) with which to purchase shelter, food, clothing and other necessities. So let’s work out a basic budget:

• The average monthly rent for a two-bedroom apartment in Edmonton in 2009 was $1059, so let’s assume a single person, sharing an apartment, has a rent of $525 and ignore the possible cost of utilities.
• A worker needs some way to get around so let’s assume a bus pass, which costs about $75 a month.
• Add on a very minimal $200 for food (based on Alberta Agriculture and Rural Development estimates) and sparse $150 for clothing, toiletries and other essentials.
• Source deductions (tax, CCP, EI) will run about $150 a month.

This leaves about $400 a month for all other expenses, including medical and dental care, emergencies, better food, a cup of coffee once in awhile and entertainment. If the worker has dependents, additional groceries and childcare costs alone will easily eliminate this $400.

Who earns the minimum wage in Alberta?
Approximately 1.4% of the workforce (~20,000 Albertans) earns the minimum wage. Data is not available on the number of workers who earn just over the minimum wage. It is often thought that minimum wage earners are primarily teenagers earning pocket money and thus not responsible for many of the costs set out above. This is untrue.

The majority of minimum wage earners are women (~70%), over the age of 24 (~61%) and have permanent jobs (~80%). This suggests that minimum wage earners are mostly working adult women attempting to earn a living. About half of minimum wage workers have high school or less and thus comprise a very vulnerable sector of the labour market with relatively few options in the workforce.

Adjustment of minimum wage
If the minimum wage is meant to ensure workers can earn enough money to get by with from month to month, then it makes sense to periodically adjust the minimum wage to account for changing prices. Some governments make periodic adjustments at the discretion of the Legislature or cabinet. Alberta previously used this system.

Discretionary systems have some drawbacks. Increasing the minimum wage causes political backlash, thus governments tend to do so only infrequently. This means the minimum wage does not keep pace with cost of living increases for these vulnerable workers. These multi-year delays also means increases (when they do happen) tend to be large, causing significant backlash from employers.

In 2007, Alberta linked annual changes to the minimum wage to changes in average weekly earnings. This allows for small, regular changes indexed to average wages. But then, in March or 2010, Alberta pre-empted the scheduled increase in the minimum wage. Minister Lukaszuk indicated that “This decision reflects what government feels will both protect jobs during these uncertain economic times and support the economy.” The proposition that a 12-cent-an-hour increase (approximately $240 per year per worker) would have derailed the economic recovery is not credible, but it does raise the issue of the relationship between minimum wages and employment levels.

Are minimum wages and employment linked?
There are mixed opinions among academics about whether increases in the minimum wage will have any negative effect on employment levels. While I am not a labour economist, my reading of the research shows it to indicate “sometimes yes, sometimes no”. It is unclear what explains the unevenness of the effect.

While the technicalities of this research are interesting, looking for a definitive answer often distract from the fact that a minimum wage is not primarily an economic policy. Rather, it is primarily a social policy because the purposes are (1) to ensure workers earn wages they can survive on and (2) prevent workers’ exploitation. For this reason, we should not use economic criteria (e.g., impact on employment levels, impact on employers) as the main basis upon which to evaluate the minimum wage. Rather, we should ask ourselves if the minimum wage allows workers to survive.

That said, economic considerations can (and likely will) play a part in decisions to increase the minimum wage. But they need to be seen in context and realistically. The Minister’s intimation that a 12-cent-an-hour increase might jeopardize the economic recovery is simply not credible. While a $240 a year increase in wage costs will have some impact on the profitability of businesses, it seems doubtful that many employers will be significantly impacted. Indeed, some employers will be positively impacted because their workers will now be able to spend an additional $240 per year.

More importantly, a $240 annual increase means the working poor—mostly women—will be better able to feed, clothe and house themselves and their families. This is, of course, the ultimate goal of minimum wage laws. In the unlikely event that some employers are forced to close their doors, we need to ask is this a bad outcome? That is to say, is it the government’s job to prop up businesses that are so economically marginal that a $240 a year increase in wages will cause them to fold? And should that support come in the form of denying the working poor a 12-cent-an-hour increase? Clearly the answer to both questions is no.

The Committee is requesting advice on the minimum wage policy. To be brief, I think the government had the basic elements correct before the Minister intervened:

1. There was a minimum wage.
2. There was a mechanism for periodic adjustment.
3. The periodic adjustment was related (if indirectly) to changes in costs faced by low-income workers.

I think you might profitably explore other indicators to index the periodic change to, such as the consumer price index. Yet using the annual change in average weekly earnings has the appeal of parity: it is what changes in MLA compensation are based on.

Thank you for the opportunity to provide input into your committee’s deliberations.


Bob Barnetson


Anonymous said...

Mostly minimum wages earning immigrants - the most vulnerable individuals. Such a low minimum wage discourage people to work. So called Business Groups insist, that low wages receive employees with low or no skills, but in reality it is not true. Even if person possess University Degrees, it is not guaranteed, that he/she will not being not able to take better job will not pick up some transitional jobs, where the wage is minimum wage.

Anonymous said...

Even, if minimum wage will be less then a dollar per hour, so called Business Groups will insist that increasing minimum wage will kill jobs. I think it is not true. It is myth. If entrepreneur is not able to pay to employee decent salary, it should declare bankruptcy and look for more efficient use of personal skills somewhere else.