As the provinces of Alberta and Ontario are anticipating the increase in minimum wage by 2018 and 2019 respectively, this week I am going to talk about the increase in minimum wage in Canada and its economic impacts.

During the presidential campaign, many candidates target the minimum wage and income inequality policies towards low to middle income families, as did Barack Obama, Hilary Clinton and President Moon Jae-in, to name a few.

Many believe increase in minimum wage will bring economic growth and will lift people out of poverty. Thus, during presidential election, a few politicians target the increase in minimum wages to appeal, and actually do obtain popularity.

However, it is interesting how this economic theory splits into two outlooks. Some politicians like Justin Trudeau do not prioritize boost in minimum wage, and states that minimum wage will not reduce poverty, but rather increase.

I personally believe that increase of minimum wage that is considered as an essential anti-poverty device will not lift people out of poverty and below are my arguments.

What is the economic problem behind it?

Main reason for the Canadian governments to raise the minimum wage is to reduce poverty and income inequality of the low and middle-income people by boosting their earned income and by ameliorating their quality of life.

Moreover, the government of B.C tries to address the minimum wage policies because increasing the minimum wage of low and middle-income people could be good news to both taxpayers and recipients, as it allows the recipient to leave welfare and enables them to earn income instead of receive it in the form of transfer payment (Gunderson, 2014).

Since economic growth is highly linked with reduction of poverty, the Canadian government is looking forward to augment minimum wage.

Then what will be the impact?

There are two potential effects of minimum wages: 1) the immediately visible effect and, 2) longer-run effects, which is subtle and less visible, also called as “law of unintended consequences (Gunderson, 2014).

First is the most evident effect, which is immediately visible: the immediate increase in income, especially of students, teens, youths and other workers that are relatively not poor and often wealthy (Campolieti et al., 2012).

Second, the most important, is the longer-run effect that rather creates slightly more poverty. Raise in minimum wages perhaps reduce the employment opportunities and hours of work, and this could occur in the form of subtle slow growth of employment or hours of work in low wage jobs (Campolieti et al., 2012). For example, hiring freeze will occur, and employers will tend to replace human labour service occupation into self-service and automated systems (e.g. gas station, cafeterias, check-out counters, etc.) (Campolieti et al., 2012).

Another long-run impact of the policy could have an effect on human capital formation in forms such as training and education that can affect poverty. In other words, younger generations will restrain from working for employers that pay lower wage jobs or even unpaid internships, which is usually a stepping-stone job that enhance young people’s succeeding wage growth (Campolieti et al., 2012).

Also, according to Campolieti et al. (2012), the minimum wage policy could have an impact on education decisions. If minimum wage increases, teens and youths will choose to drop out of school and go to workplace instead. From studies, higher minimum wage will encourage students to choose high-wage job over education (Campolieti et al., 2012).

Furthermore, in the longer-run, minimum wage could have an impact on young people to obtain jobs when they first enter the labour market, and this could have a permanent scarring effects as well as restraining young people from gaining informal training and experience (Campolieti et al., 2012).

Lastly, according to Campolieti et al. (2012), with increase in minimum wage, price of goods and services consumed by lower income people will raise as consequence.

In the case of Canada, Alberta and Ontario is anticipating the increase in minimum wage by 2018 and 2019 respectively, but some rough calculations for Alberta indicates a potential loss of around 25,000 jobs (Marchand, 2016).

Moreover, according to Gunderson (2014), the Canadian evidence shows that the increase in minimum wage will have no impact in reducing poverty, but may rather exacerbate poverty slightly. 

Any recommendations?

As discussed above, minimum wages policies reflect the economic “law of unintended consequences”(Gunderson, 2014). Therefore, alternative policies should be presented in order to avoid these unintended consequences.

In my opinion, diminution of poverty should be accomplished through policies such as the Working Income Tax Benefit (WITB) in Canada (WITB is a refundable tax credit intended to provide tax relief for eligible working low-income individuals and families who are working and to encourage Canadians to enter the workforce).

As suggested by Campolieti et al. (2012), WITB policies is based on wave subsidies targeted towards the working poor, administrated through the tax system so they can be based on family need, with the subsidy reduced as income increase so as to minimize spillover benefits to those with higher income (Campolieti et al., 2012). 

Since it is the state that pay the higher wages to workers rather than employers, subsidies through such program like the WITB will be much better targeted to the working poor without adverse employment effects (Campolieti, Gunderson, & Lee, 2012).