A groundbreaking Canadian study has found that minimum wage hikes are good for a large group of workers, not just those paid at the minimum wage.
In fact, workers paid just above the minimum wage often express hesitancy or opposition to a minimum wage increase, because they think a raise will erode their earnings. Their argument is something along the lines of, more people earning a bit more will mean their premium over lesser-paid workers will decrease, and they’d lose out.
This research disproves that theory.
Wait What?
Using 16 years of data, from 1997 to 2013, Canadian researchers Nicole Fortin and Thomas Lemieux found that 5% of total Canadian workers were paid the minimum wage, and that wages for the lowest 15% of Canadian workers rose after minimum wage increases around the country.
That’s three times the pool of workers at the minimum wage.
The wage increase for 15% of the lowest paid workers had the effect of narrowing the wage inequality gap in Canada. In other words, it means that the gap between the richest and poorest Canadians shrunk.
Fortin & Lemieux also found that the majority of workers who benefitted from the wage increases between 1997 and 2014 had lower levels of education or were younger workers.
That implies a minimum wage increase helps folks who are the least resourced, and actually a smaller boost than we’d think can do the trick. Increase wages for 5% of people, and boost incomes for three times as many workers.
An article we recently read in Perspectives Journal points to research showing that keeping real wages low leads to greater wage inequality.
“Real wages” is the amount you earn after taking away the effects of inflation. Over time, inflation increases, and it increases the dollar amount that things cost or the dollar amount of a salary.
Inflation is why a hot dog used to cost 5 cents, a house used to cost $80,000 and a good salary used to be $25,000. Today, a hot dog is $17 at a Taylor Swift concert, a house costs $1M in Toronto on a good day – and you could pray to afford that house (but still fall short) on a salary of $100,000.
The dollar price that has gone up is the “nominal wage”. It’s the sticker price of the thing we want to buy or receive.
Plenty of recent reporting has shown that the real value of salaries has fallen as inflation has risen, especially with the wild inflationary ride during the pandemic.
You may have received a cost of living (COLA) adjustment of 2% in the midst of the pandemic, during a time when inflation was 3%… or 8%. That means that the real value of your wage has fallen. It’s not just a feeling, it’s a fact: a salary of $20,000 today can afford less than it did two years ago, even if it was the result of a small pay bump.
Shouldn’t We Just Lower Taxes?
So next time you hear someone say we need to lower taxes, perhaps suggest we actually all need raises instead. Raises mean more people have disposable income, which is shown to circulate in the economy 2 to 3 times as people buy and sell stuff (it’s called the multiplier effect). Meanwhile, tax cuts disproportionately benefit higher-income individuals and don’t put as much money back into people’s pockets permanently. Our economy grows more with raises than with tax cuts.
Remember we mentioned that the wage gap shrunk?
Let’s talk about that pesky wage gap.
The Perspectives Journal explained that keeping wages below the inflation rate might explain up to half of the wage gap that has grown over time. Other stuff, like CEOs taking bigger bonuses, or more high-paid tech jobs being created, could be other reasons why income inequality is rising. But this all indicates a very simple solution: to stop the wage gap from widening, minimum wages need to stay at least on par with inflation. To close the wage gap, minimum wages need to rise higher than inflation rates.
In Canada, we have minimum wage rates and planned increases that aim to reflect the effects of inflation. As we know, the minimum wage rate falls short of doing so. The latest minimum wage increase in Ontario in October 2024 fell notoriously short of a living wage.
Revising government policy on the minimum wage could be a big winner to reduce income inequality that makes life precarious and stressful for Canadians. A small increase in wages, paid for by employers and perhaps helped with a break elsewhere for businesses when times are very tough, could raise the standard of living for everyone and reduce stress on Canada’s social safety nets.
Articles mentioned in this blog:
Perspectives Journal: https://perspectivesjournal.ca/minimum-wage-spillover/
Fortin & Lemieux’s 2015 article: https://onlinelibrary.wiley.com/doi/10.1111/caje.12140
Recent Comments