Halifax – Minimum wage legislation perpetuates poverty and eliminates job opportunities. It’s a sobering finding in the first of a four part AIMS Labour Market Commentary Series by Morley Gunderson, the CIBC Chair on Youth Employment at the University of Toronto and a Fellow of the Royal Society of Canada.

In Minimum Wages: Operating with a blunt instrument, the respected labour economist dispels the myth that minimum wage legislation alleviates poverty among the working poor. Gunderson calls a minimum wage a crude instrument for curbing poverty which is poorly targeted toward the poor because it also affects the wages of young people and multiple earners in non-poor families.

“Minimum wage jobs are poorly targeted since poverty is related to family income relative to family need, while a minimum wage is paid to individuals irrespective of their family situation or need,” Gunderson says. “A minimum wage affects only small portions of the population and does little to increase earnings.”

He points out that multiplied by a full-year, full-time work year of 2,000 hours, a typical minimum wage increase of 25 cents per hour would increase annual income by $500, and the effect would be less for most because almost 60 percent of minimum wage workers work part time.

Gunderson also reveals recent Canadian evidence finds that a 10 percent increase in the minimum wages reduces the employment of teens by three to six percent and slightly less for young adults.

“This adverse effect occurs in the form of slower employment growth relative to what would have happened in the absence of the minimum wage increase,” he explains. It’s evidence that provincial governments need to consider as they implement yearly increases in the minimum wage.

In Ontario, for example, the minimum wage is scheduled to increase 28% over a two year period ending March 2010, which takes the hourly wage from $8.00 to $10.25. In Nova Scotia the increase is 19% by October 2010. Newfoundland and Labrador is scheduling 50-cent increases over the next two years for a 25% increase. And in Saskatchewan the minimum wage is scheduled to increase by 7.6% on May 1, 2009. (Click here to review more minimum wage statistics)

Gunderson provides proven alternatives to minimum wage legislation. He says those policy alternatives include earnings subsidies along the lines of the earned-income tax credit in the United States (and other countries), which have generally been regarded as effective and have increased in importance over time, irrespective of the “stripe” of the party in power.

“Refundable tax credits also effectively increase the wages of the working poor, without having an adverse effect on employment or hours worked,” explains Gunderson. “Working through the tax system can better target individuals or families, as well as dealing with child poverty.”

Gunderson says Canada took a step in this direction in the 2007 federal budget with the federal Working Income Tax Benefit, which essentially provides the working poor a refundable tax credit of 20 percent of their earnings above $3000 and subject to a limit. He suggests that by augmenting labour market earnings, the benefit should encourage them to work more. He says such programs merit more consideration since they “make work pay,” in contrast to a minimum wage, which can make paid work disappear.

Minimum Wages is the first in a four part Labour Market Commentary Series to be published this month by AIMS. The other topics to be covered are Payroll Taxes, Mandatory Retirement, and Replacement Workers.

“This series sheds light on some very important policy issues in this increasingly complex labour market,” says AIMS President Brian Lee Crowley. “For example, it may be politically expedient for politicians to increase the minimum wage, especially since it allows them to look like they are doing something about poverty at no cost to themselves, because the money costs are borne by employers. As this Commentary shows, however, such a strategy in fact perpetuates poverty and eliminates jobs. That’s a policy we cannot afford, especially when there are better alternatives available that address poverty more directly and effectively while not damaging job creation.”

To read the complete Commentary, click here.

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For more information, contact:

Morley Gunderson
416-978-5398

Brian Lee Crowley, AIMS President
902-499-1998