Progressive politics, ideas & culture

July-August 2004

Minimum wage increase equals minimum benefit

Bruce GillespieWebsite@bgillesp

Illustration of hand flipping two cents onto a five dollar billDoes increasing the minimum wage by 30 cents actually benefit low-wage earners? It seems like employers just pass the added cost on to consumers, increasing the cost of living for everyone, including the working poor. So is a minimum increase really worth it in the end?

The simple answer is yes, if only because no government is likely to hike the minimum wage by $2 or $3 for fear of raising the cost of doing business too quickly and sending jobs to cheaper regions. So, if it weren’t for 20-cent or 30-cent increases, there would be no increases whatsoever.

But you raise an interesting point about whether those small increases get eaten up by higher-priced goods and an increased cost of living. It is clear that the price of some goods do rise after the minimum wage is increased. When Ontario’s rate was raised in February—to $7.15 from $6.85, the first hike in almost nine years—it was hard not to notice the price of a cup of coffee breaking the $1 mark and fast-food combos ringing in at about $7.

But Norman Cameron, an economics professor at the University of Manitoba, cautions against assuming those increases are across the board. “This only affects parts of the economy that employ minimum-wage workers, who are 10 percent of the labour force at most,” he says. “It’s not going to affect the health, education, manufacturing, transport or wholesale sectors.”

So, while the canny consumer will notice price jumps at service sector businesses—such as coffee shops, department stores and fast-food restaurants—those increases won’t have a dramatic effect on the cost of living as a whole. At most, it might translate into an increase of one-half of one per cent, Cameron says. And because increases to the minimum wage usually “trickle up” as employers try to keep their pay rates proportional, other low-income workers often aren’t burdened by an increased cost of living.

It also isn’t a given that businesses will automatically push their higher labour costs on to consumers, especially in the highly competitive service sector, says Charles Beach, an economics professor at Queen’s University and editor of Canadian Public Policy. “It depends partly on the degree of competition,” he says. “If you’re close to going out of business, then you really can’t push your prices much higher.” As well, he says most businesses only pass on about two-thirds of their labour costs to consumers.

So, small increases in the minimum wage are not entirely eaten up by an increased cost of living, giving low-wage earners more spending power. But not much more, says Todd Scarth, director of the Manitoba office of the Canadian Centre for Policy Alternatives. “The big problem is that [most] provinces have allowed the purchasing power of the minimum wage to be eroded significantly by inflation,” he says.

Given that the cost of living increases about two percent a year, in the case of Ontario, the recent minimum wage increase of 30 cents an hour is barely a four-percent hike and doesn’t even come close to the 18-percent increase required just to keep pace with inflation. “The answer is continued, sustained and, for the benefit of both workers and [businesses], predictable increases that ultimately add up to enough to make a difference,” says Scarth.

But that’s a hard sell to provincial governments. While Ontario, for example, has trumpeted its new plan to aid the working poor by making annual increases to the minimum wage until it reaches $8 an hour in 2007, that will still fall about 22 cents short of what’s required just to keep pace with inflation.

Have a question you want answered? Email [email protected].

This Magazine welcomes Bruce Gillespie, who takes over our This & That section with this issue. He is a freelance writer and editor whose work has appeared in Saturday Night, Quill & Quire, the National Post and Bankrate Canada. He lives in Simcoe, Ontario.

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