The Minimum Wage Fallacy

Minimum wage has been a hot topic of discussion lately. A number of American cities have adapted a $15 minimum wage law, and an American group known as “Fight For 15” has been protesting for other cities to adapt the same wage. Here at home, the Alberta NDP campaigned on raising the minimum wage to $15/hour by 2018 (they have hinted at an increase to $12/hour by October 1). In theory, this so-called “living wage” sounds like something that would raise up the lower class and decrease income inequality. In practice, it’s a whole other story.

One common argument made by proponents of the $15 minimum wage is that corporations can easily afford the increased labour costs. While this may be true for large corporations such as McDonald’s and Walmart, these corporations have invested the money in developing electronic self serve options, and these are already being seen in cities like Seattle and Los Angeles (both of which have introduced $15 minimum wage laws). Seattle’s minimum wage laws took effect on April 1 (with a 7 year maximum timeline for full implementation for small businesses. Large businesses have a 3 year timeline). Leading up to this date, a large number of well-known Seattle restaurants made the decision to shut their doors. The Washington Restaurant Association estimates that the average Seattle restaurant, prior to the implementation of a $15 minimum wage law, had a budget breakdown of 36% labour costs, 30% food costs and 30% other operational costs, with a profit margin of only 4%. After the minimum wage increase, the labour costs are expected to rise as high as 47% in a full service restaurant. This will not only eliminate the 4% profit margin, but will also hit the bottom line of these restaurants hard, and without restructuring or increasing the price on consumers, will almost surely lead to the closure of even more restaurants down the road.

With all of the above said, the biggest victims of a massive minimum wage increase may be the very people that its proponents claim to be fighting for. A recent study conducted by the Canadian Federation of Independent Business concluded that for every 10% increase in minimum wage, there will be an approximate 3-6% reduction in jobs for students and young workers. Here in Alberta, Rachel Notley’s NDP has proposed a 50% increase to minimum wage. Using this same CFIB study, that could equate to a 15-30% reduction in jobs for students and young workers. Notley has also hinted that she will eliminate the $1 difference in minimum wage for liquor servers. The impact of this is unknown at this point, but some pundits have suggested that it may lead to a decrease in tips. One aspect of a $15 minimum wage that hasn’t been mentioned much by the media is what will happen to those who currently make $15-20/hour. Workers currently making salaries within that range would likely require salary increases to remain satisfied in their positions, further increasing the labour costs on businesses. This will trickle down to the consumer and increase costs for everyone, including those that the $15 wage proponents claim to be fighting for.

Minimum wage jobs are not intended to be a career, but rather a stepping stone, and a source of income for students and young workers. As of March, only 2.2% of Albertans were working for minimum wage (compared with 7.6% on a national scale). Of the workers making minimum wage in Alberta, 51.3% were under the age of 25, 55.3% were part time workers, and 27.8% were temporary workers. Furthermore, 46.7% of these workers had been on the job for less than a year, and 35.2% had an education level less than a high school diploma. These statistics can be seen in further detail on the Government of Alberta’s Minimum Wage Profile, released in March 2015. This raises many questions as to exactly why Notley has been so insistent on raising the minimum wage. Interestingly enough, Notley hasn’t even suggested increasing the income tax personal exemption amount, which would have the greatest positive impact on low income earners. Due to this, some analysts have suggested that Notley’s main motivation behind increasing minimum wage may be to simply increase the amount of income tax going back to the government.

There is no way to know Notley’s true intentions, nor predict the full impact of a $15 minimum wage on Albertan workers and businesses, but the existing evidence and studies point to this being a very poor policy. Coupled with the promised 20% increase to current corporate tax rates, this minimum wage increase could be especially disastrous. Albertans need to brace themselves, because the upcoming NDP minimum wage increase is not looking like the saving grace that the NDP claims it will be. Instead, it’s looking like a very gloomy situation for everyone from the average consumer to those workers actually making minimum wage. Hold on to your wallets, Alberta. It’s going to be a bumpy ride.
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