Minimum wage hike does more harm than good: think tank

Raising the minimum wage will do little to reduce poverty mainly because most minimum-wage earners don’t live in low-income households, suggests a new study by the Fraser Institute.

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“Despite good intentions, the evidence shows increasing the minimum wage is not an effective policy for helping Canadians struggling with poverty,” said Charles Lammam, director of fiscal studies at the Fraser Institute and report co-author.

The reason, in part, is that 88% of Canadian minimum-wage earners do not live in low-income households, as defined by Statistics Canada’s Low Income Cut-off or LICO. (A household with income under the LICO line will likely devote a larger share of its income on food, clothing and shelter than the average family.)

Moreover, nearly 60% of minimum-wage earners are teenagers or young adults (ages 15 to 24) often working their first job, with the vast majority (85%) living with parents or other relatives. Another 20% live with an employed spouse. Crucially, just 2% of Canadian minimum-wage earners are single parents with at least one child.

“The perception that the typical minimum-wage earner is a single parent struggling to survive does not align with the facts,” Lammam said.

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Moreover, minimum wage hikes can do considerable harm by decreasing employment opportunities for low-skilled workers—the very group the policy is designed to help. According to Canadian research, a 10% increase in the minimum wage reduces employment for low-skilled workers by between 3% and 6%.

These unintended consequences, along with its inability to target low-income workers, explain why the minimum wage is not effective at reducing poverty—and in some cases, can make matters worse. Despite these facts, every Canadian province increased its minimum wage in 2015 except New Brunswick, which increased its minimum wage in 2014.

Fortunately, there are better ways to help low-income workers than increasing the minimum wage. One policy change worthy of consideration is the Working Income Tax Benefit (WITB), a refundable tax credit that allows low-wage workers to keep more of their earnings.

“Minimum wage hikes can prevent low-skilled workers from entering the job market, pursing advancement opportunities, and improving their living standards—poor outcomes for a policy aimed at helping those in need,” Lammam said.

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Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.