The Broadbent Blog

A federal minimum wage would benefit both workers and employers


The Leader of the Opposition, Tom Mulcair, is to be congratulated for his proposal to re-introduce a federal minimum wage.

Abolished in 1996, the federal minimum wage applied to the approximately 8% of all employees who work in federally regulated industries. It also used to set a national benchmark for provincial minimum wages. Mr. Mulcair's proposal is in line with the 2006 Federal Labour Standards Review that was appointed by the Minister of Labour and led by Harry Arthurs, a distinguished labour law expert who was Dean of Osgoode Hall Law School and, later, President of York University. Professor Arthurs, who recommended that a federal minimum wage be re-introduced, argued that “the government should accept the principle that no Canadian worker should work full-time for a full year and still live in poverty... this is an issue of fundamental decency that no modern prosperous country like Canada can ignore.” 

Tackling poverty and income inequality isn't just about redistributing wealth, but also ensuring a fairer pre-distribution of market incomes – something a federal minimum wage could help do. 

Not surprisingly, Mr. Mulcair's minimum wage proposal was met by predictable claims from right-wing business groups that it will result in higher unemployment. The mainstream economic view, however, is increasingly that minimum wages set at reasonable levels help reduce the ranks of the working poor and do not have a significant negative impact on jobs.

The Paris-based think tank for advanced industrial countries, the OECD, argues in its just-released Employment Outlook that minimum wages “can help underpin the wages of low-paid workers” and thus boost incomes and lower poverty. They also report that “(e)vidence suggests that, when set at an appropriate level, minimum wages tend to have only a small adverse effect on employment.”

Minimum wages in OECD countries average around one half of the median or mid-point hourly wage, and range up to two-thirds of the median. In Canada today they are at about 40% of the median wage or around $10 per hour, below the OECD average.  

The classical economic view used to be that minimum wages raise the price of labour and thus result in less employment. But an exhaustive summary of the academic literature by John Schmitt of the Center for Economic Policy Research in the United States finds that this is not the case. The great majority, including dozens of recent studies, conclude that the negative effects on employment of modest minimum wage increases are extremely small. The results cluster very close to zero or just below zero.

Where there are small negative impacts upon hours worked, it is because employers raise productivity by investing in machinery and in skills. This allows them to produce more per hour and to pay higher wages.  Any small negative impacts on hours worked will still leave workers better off since their wages are higher. For example, someone working 30 hours per week for $10 per hour at Wal-Mart will be better off with a minimum wage of $11 per hour, even if their hours of work were to be cut by two hours per week (income of $308 per week versus $300 per week).

Decent minimum wages can correct for a significant tendency by low-wage employers to pay less than the wage which actually serves their own best interests. Many low-wage employers have job vacancies at any given time due to high worker turnover. But they are reluctant to raise wages to fill these vacancies since they would then have to pay more to all of their current work force. An equilibrium point may be to pay very low wages even if operations are not properly staffed at all times.

A higher minimum wage will help employers by reducing turnover thereby reducing employer costs in three ways: employers will not lose business due to not having enough workers on a shift; they will have more experienced and more committed employees; and they will save on recruitment and training costs which can be significant even for low-skill jobs.

The best mainstream economic evidence shows that if a federal minimum wage were to be introduced at a reasonable level compared to other advanced industrial countries, it would benefit not just low-wage workers, but also many employers.

Andrew Jackson is Senior Policy Advisor to the Broadbent Institute.

Photo: Sweet One. Used under a Creative Commons BY-NC-2.0 license.