What happens when you
raise minimum wage?
Since the NDP was elected in May, a fierce debate has raged
in Alberta. On one side, proponents herald a “living wage” for all Albertans,
and on the other, opponents predict economic destruction.
This post discusses who makes minimum wage, what has happened in the past when minimum wage was increased, and what could happen to Alberta when the minimum wage is raised over the next few years.
This post discusses who makes minimum wage, what has happened in the past when minimum wage was increased, and what could happen to Alberta when the minimum wage is raised over the next few years.
Who makes
minimum wage in Alberta?
According to Labour Alberta, about
370,000 workers (or 22% of the working population) in Alberta make less
than $15/hour. With 38,000 people making the current minimum wage of
$10.20/hour ($9.20 if you’re serving alcohol).
Aren’t teenagers the only ones making minimum wage?
65% of minimum wage earners are over 20, and 50% are 25 and
over.
Aren’t minimum wage jobs temporary?
67% of people in Alberta work a minimum wage job as
permanent, year-round employment.
Economic theory:
raising minimum wage
Economic theory separates minimum wage impacts into three
key categories:
1) Increased inefficiency (or unemployment) in the labour
market,
2) Increased spending (or economic output) by those now
making a higher wage,
 |
|
Jerry the Giraffe pays
Terry the Turtle to repair his kitchen sink
and then buys carrots off this very
entrepreneurial rabbit.
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3) Increased spending by those receiving the increased spending by those making a higher wage (what economists call the multiplier effect).
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Terry the turtle goes drinking with a bear in lederhosen and then pays a monkey cab driver to drive him home (don't drink and drive), and that entrepreneurial rabbit pays a hamster to do his taxes, and a dog to build an extension to his home.
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So theory says it could go either way, but what actually
happens when you raise the minimum wage?
The Canadian Centre for Policy Alternatives analyzed every
instance of raising minimum wage in Canada between 1982 and 2012 (70 times in
total), and tried to isolate the impact that the increase in wages had. They
found the unclear impact that theory suggests. Out of 70 times minimum wage was
increased, 63 instances (90%) saw no connection between the increase in wages and higher or lower employment. In the remaining 10% of the times, an increase in
employment was found 3 times, and a decrease was found 4 times.
Given how unclear the
impacts are, what should we do?
Stats
Canada’s recent report on minimum wage shows that it has remained largely
unchanged in real terms (adjusted for inflation) since the 1970s. This means
that in an average Canadian city, people making minimum wage today have roughly
the same buying power as people who were making the minimum wage in 1973.
However, in the province of Alberta, prices have increased faster than any
other province (since 2002, inflation has been 32.4%), meaning that buying
power of those making minimum wage has decreased substantially. Minimum wage is
one way of making sure that all Albertans can afford to live.
But isn’t this
increase to minimum wage bigger than others and won’t that cause prices to go
sky-high?
To see what a shift from the current minimum wage of $10.20
an hour to $15.00 an hour looks from a
business perspective, let’s imagine a made-up burger restaurant that sells 4,000 burgers
each month in 2015:
Costs
|
Dollars per burger
|
Labour (4 employees at $10.20 per hour)
|
$1.64
|
Buns/meat, etc.
|
$2.50
|
Rent ($1800 per month/4000 burgers)
|
$0.45
|
So how would the increase in labour costs affect the cost
of this burger?
If Inflation over the three years is 2% per year, and minimum
wage rises to $13 in 2016 and $15 in 2018, we can see the following impacts:
Over the course of three years, the cost of a burger for this business rose by less than $1, and 20% of this increase was from inflation! This example is fairly simple, but it does show that the impact to costs are likely quite modest and as a result, could be passed to consumers without causing them to buy less of it.
What is the potential
impact to Alberta’s economy?
So if 370,000 people currently make below $15/hour, what is
the economic impact of raising their wages to $15/hour?
Well we know that 38,600 employees make the minimum wage and
the average wage in Alberta for the food and accommodation sector is $12.76, so those making less than $15/hour combine to make about $6.9 billion per year (or
$18,740 per person before taxes).
At $15/hour, their wages combine for a little over $8.3
billion (or $22,500 per person before taxes). This additional $1.4 billion then
gets spent and spent in the economy (multiplier effect). If minimum wage earners save 20% of their
wages and spend the rest, then the impact to the Albertan
economy could be almost $7 billion per
year, or an increase of about 2%.
Thanks for reading
Let me know if you have any questions about minimum wage policy, or if you would like me to cover a particular economic topic in the future.
Thanks for reading
Let me know if you have any questions about minimum wage policy, or if you would like me to cover a particular economic topic in the future.
Sources
