Don’t raise the minimum wage. Fine-tune it

Posted on March 27, 2015 in Policy Context – ROB/Insight
Mar. 27 2015.   Todd Hirsch

“It’s just not possible,” say the anti-poverty advocates. “You can’t live as an independent adult on minimum wage, particularly in the larger cities where living costs are high.” It’s a common refrain heard across the country in response to provincial minimum wage laws. What employers are required to pay doesn’t adequately address urban poverty, which is a growing problem in Canada.

“But raising the minimum wage will kill jobs,” say the right-wing think tanks and the small-business lobby groups. “Forcing businesses to raise their wages will result in fewer jobs. It may even force them to close their operation altogether. A low-paying job is better than no job at all.”

They’re both correct, of course. But they’re also both arguing about a policy that needs reform. As a way of addressing poverty, minimum wage laws are very blunt tools. Are there ways to sharpen the tool so it both tackles poverty but isn’t overly punitive on small businesses?

The problem with an across-the-board minimum wage is that it doesn’t allow companies to discriminate between workers. An adult living in an urban area is doomed on minimum wages, even working 44 or more hours a week. If there are children in the equation, they’re doomed too. They truly do require more.

But a 16-year-old high-school student living at home, supported by parents, working twelve hours a week in the mall food court, is not doomed on minimum wage. And that first job is critical for young people getting work experience.

Yet the employer can’t pay the high-school student less per hour than the single parent simply because the parent requires more money. And legislation that would force the employer to pay a higher minimum wage to both workers could certainly result in one of the two losing the job. That would be a terrible outcome no matter who loses out.

Maybe a solution can be found to sharpen the minimum wage tool. In the Netherlands, the minimum wage increases with the worker’s age. A 15-year-old must be paid a minimum of €2.89 an hour ($3.92, up to 36 hours a week). When the worker turns 16, it rises to €3.32. It notches higher by increments of about €0.50 to €1.50 an hour until it peaks at €9.63 for a 23-year-old worker.

As well, the minimum wage is set officially by month, week and day – not hour. As it works out, the hourly wage actually falls a bit for workers with more hours per week. For example, a 23-year-old part-time worker earns €9.63 per hour, but if they’re willing and able to work full-time (40 hours) the hourly wage drops to €8.66.

This allows employers to discriminate not only by age of worker, but also by the availability of the worker to put in more hours. A high-school student in his teens earns much less per hour than a young adult worker. But the employer also has an incentive to give more hours per week to the adult who is able and willing to work full-time.

It may seem like a bit of a complicated system. But if Canadians find value in establishing a minimum wage in the first place, then it makes sense to fine tune the program to maximize its usefulness.

Someone may argue that such a system allows employers to discriminate against people based on age. Isn’t that unconstitutional? Canada’s social programs already include a good deal of age-based discrimination (e.g., Old Age Security). It also allows governments to discriminate on other factors, such as the number and age of their children ( e.g., Canada Child Tax Benefit). So if we consider the minimum wage as an anti-poverty social policy, then age discrimination surely can’t be a hurdle.

There’s no getting around it: Urban poverty is a tragic and growing problem in Canada. While everyone likes the idea of adults supporting themselves and their children by working, it’s just not possible on minimum wage. An across-the-board minimum wage is the problem. Perhaps the Dutch example offers some sensible guidance for Canada.

Todd Hirsch is the Calgary-based chief economist of ATB Financial, and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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One Response to “Don’t raise the minimum wage. Fine-tune it”

  1. Ted Alden says:

    Mr. Todd Hirsch, would you kindly send my references that substantiate this idea that raising minimum wages kills jobs? Of all that I’ve managed to get my hands on are, Fraser Institute type stuff that simply uses quotes from other quotes as substantiating references, none of which leads to a study, and certainly not anything remotely close to empirical.


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