B.C.’s minimum wage hike hurts workers

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Appeared in Business in Vancouver, June 17, 2024
B.C.’s minimum wage hike hurts workers

In June, the Eby government increased British Columbia’s minimum wage from $16.75 per hour to $17.40, which is the highest of any province. Proponents of the increase argue it will reduce poverty—but what does the evidence show?

According to a 2021 study, 8.8 per cent of all Canadian workers earned the minimum wage. Of those minimum wage earners, in British Columbia, just 7.9 per cent lived in households below the “low-income cut-off” or LICO, which is often used as a proxy for the poverty line.

Put simply, 92.1 per cent of minimum wage earners in B.C. lived in households above the LICO, mainly because most minimum wage workers are not primary breadwinners in their households but are rather secondary or tertiary earners (for example, a spouse working part-time or school-aged children still living at home who work part-time).

These results are borne out by a separate study, which analyzed the impact of minimum wages in Canada from 1997 to 2007 and found no statistically significant effect on poverty. Another study measured the impact of increases in the minimum wage from 1981 to 2004 and found that a 10 per cent increase in the minimum wage was associated with a 4 to 6 per cent increase in the percentage of families falling below the LICO, due to a reduction in employment (and correspondingly, income).

Indeed, a vast body of empirical research shows that a higher minimum wage actually may hurt—not help—workers as it can have negative effects on employment. Why? Because as the cost of labour increases, employers tend to hire fewer workers (or even fire workers) and/or reduce the number of work hours for remaining workers. In other words, we shouldn’t assume that minimum wage workers retain their employment and the number of hours available to work when the government increases the minimum wage. In fact, according to the evidence, both employment and work hours often decrease when minimum wages rise.

And unfortunately, the least advantaged are often hardest hit, as younger and less-educated workers often suffer the most job losses resulting from higher minimum wages.

So, what should the government do?

B.C. has some of the highest personal income tax rates in North American, particularly after the NDP government’s recent series of tax hikes, which were exacerbated by federal tax increases. Rather than increase the minimum wage, the government should cut taxes.

Moreover, many government benefit programs are based on income, which means that workers at certain income levels will lose some of those benefits—that is, their financial benefits will be “clawed back”—as they earn additional income. At the same time, workers pay higher taxes as their income increases. Economists call this combined effect of clawed back financial benefits and higher taxes the “marginal effective tax rate” or METR. In B.C., METRs hit low-income families particularly hard. In fact, many low-income workers in B.C. take home 40 cents or less on each additional dollar earned due to the METR.

Despite any rhetoric from Victoria, the vast majority of minimum wage workers aren’t poor, which means a higher minimum wage in B.C. won’t meaningfully alleviate poverty. In fact, due to negative employment effects, a higher minimum wage hurts many B.C. workers. If the government wants to help B.C. workers deal with the rising cost of living, it should reduce taxes.

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