Minimum Wage, Minimal Effect

The minimum wage is a classic wedge issue in political discourse and both sides of the argument represent wider philosophical camps. Proponents claim the policy helps exploited members of the working poor and promotes economic equality. Opponents criticize, however, criticize the minimum wage for hampering voluntary exchange and decreasing employment and competitiveness.

Those who value economic equality and fairness should back away from this current discourse and ask whether a minimum wage actually advances their objectives.  In practice, minimum wages poorly targets those it aims to help and has a number of adverse unintended consequences.

The most common criticism of minimum wage laws goes as follows: according to the law of demand, increasing the price of something decreases how much it people choose to consume. When the cost of low-wage labour increases, therefore, firms respond by scaling back their use of said labour through lay-offs or cutting hours. Research conducted by Canadian academics supports this assertion.

Supposing, for a moment, that minimum wage does not increase unemployment in the short-term, it is, in any case, likely to increase unemployment in the long-term. Because employers have invested in employee training costs and because there are costs associated with relieving employees (i.e. severance), for instance, businesses are less likely to cut jobs the day a minimum wage increase is legislated.

If firms are compelled to pay their workers more, they will use more effective means of production as substitutes for domestic labour. Using these substitutes–like automation and outsourcing–means that companies employ less labour.

A decrease in employment, however, is not the only possible outcome. The concept of compensating differentials, for instance, posits that wages are not the only compensation workers receive or, in the very least, consider. Rather, workers may be happier with a lower salary in exchange for something else, such as benefits or a safer work environment.

Faced with higher mandatory wages, firms may be compelled to curb other labour costs. For instance, they could remove training opportunities, stop providing compulsory uniforms, or make the workplace less comfortable by, for example, paying less for utilities like heating and air conditioning.

Let us imagine that increasing the minimum wage boosts the income of those fortunate enough to earn a wage at all. Does the mandatory wage increase help low-income households?

Unlikely. Looking at the profile of Canadian minimum-wage earners, roughly 6% of employed Canadians (most of which are students) live with their families, about 60% work part-time, and half leave their job within a year. These employees, in other words, are largely dependents working temporary jobs and not the working poor who policymakers attempt to target with minimum wage legislation.

If boosting the salaries of the working poor is the objective, looking at policies that address severe underemployment–policies that, for instance, provide basic minimum incomes or increase access to education–is a much more suitable measure. The minimum wage, however, is a distraction disguised as a panacea. Unfortunately, increasing it does little but harm to those it seeks to help.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

The Energy-East Pipeline: An Opportunity to Turn a Province Around

New Brunswick has been making a rare appearance in the national editorial pages and the prospect of natural resource development through the Energy East Pipeline has been the principal topic of debate. Some observers argue that this could be the province’s opportunity to turn around its fortunes, but, as always, there is opposition citing environmental problems, among others.

That opposition generally stems from the argument that Canada must end its reliance on fossil fuels and fears of possible oil spills in the future.

While environmental concerns are particularly important in all natural resource development cases, it would be irresponsible for any government (of any political stripe) to ignore the possibility for serious economic gains. This fact becomes very clear from an examination of the state of the New Brunswick’s economy and the stimulus the project could provide.

It is no secret that New Brunswick has faced serious economic problems since the 2008 global economic meltdown. In September 2013, Statistics Canada reported that the province faced a 10.7% unemployment rate, which is one of the highest rates in the country. In conjunction with this report, CBC reported in the same month that the province lost approximately a net 2,944 individuals to other provinces in 2012.

Although these are only two indicators of economic performance, they tell a story that New Brunswick is facing a major economic problem.

This brings forward the next level of discussion: How can the Energy East Pipeline help build the New Brunswick economy?

TransCanada, the company who wishes to build the pipeline, employed Deloitte to explore the economic benefits of the pipeline for Canada. Deloitte found that the pipeline would add the following figures to New Brunswick’s economy:

  • $2,799 million to GDP
  • S266 million in tax revenues during construction (6 years)
  • $428 million in tax revenues during the operation phase (40 years)
  • 868 jobs in development (3 years)
  • 2866 jobs in construction (3 years)
  • 385 jobs per year in the operations phase (40 years)

These large amounts of tax revenues could mean balanced budgets for New Brunswick and extra money to spend in other areas of government, such as education and healthcare. Balanced budgets will also restore investor faith in New Brunswick.

The pipeline would create jobs that would not only reduce unemployment, but also increase consumption. That will lead to more economic spin-off, meaning that individuals will be able to afford more and, therefore, will buy more goods and services creating even more jobs in turn.

In conclusion, considering the state of the New Brunswick economy, it would be reckless for the government not to consider the opportunities that could be afforded to the province through natural resource development: the numbers show clearly that there is an extreme potential for growth and the Energy East Pipeline could have serious economic benefits for the province.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute