Help the working poor with targeted benefits, not misguided minimum wage hikes

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Appeared in the Globe and Mail, March 21, 2018

Everyone wants to help the working poor. Unfortunately, governments across the country (including Ontario, Alberta and British Columbia) are going about it the wrong way by committing to raise the minimum wage to $15—a misguided move that does a bad job of targeting the people we want to help and produces a host of unintended consequences.

But the recent federal budget, which made changes to the Working Income Tax Benefit—now renamed the Canada Workers Benefit (CWB)—features a better way to help the working poor.

While the CWB has been around since 2007, it does not receive the attention it deserves as an effective policy tool for helping the working poor. The budget proposes to enhance the program, a move that will almost certainly do more to help the working poor than provincial minimum wage hikes.

Here’s how it works. The CWB provides cash transfers to working Canadians below a certain income level. Basically, the program encourages labour participation by rewarding work. The evidence from a similar program in the U.S. (the Earned Income Tax Credit) suggests this type of program boosts participation in the workforce.

With the enhancements announced in the budget, couples or single parents with family incomes below $36,483 will receive a maximum annual benefit of $2,335 while single workers making less than $24,111 will receive a maximum of $1,355.

The family income threshold for receiving benefits is a critical feature of the CWB. It means the program targets working families that have relatively low income. In contrast, the minimum wage does not efficiently target low-income families since 88 per cent of minimum wage earners in Canada do not live in low-income households, as defined by the Statistics Canada’s low-income cut-off.

While this may sound counterintuitive, the reality is most minimum wage earners aren’t the sole or primary earners in their household. Typically, they are young people living at home with their parents or have an employed spouse.

This highlights the fundamental problem with the minimum wage—it’s not a well-targeted anti-poverty tool. The CWB, on the other hand, does a much better job of ensuring families with relatively low income benefit from the policy.

But the problem is not just that the minimum wage ineffectively targets the working poor, it also makes it harder for less-skilled workers to find work. When employers are forced by government to pay higher wages to young workers with little work experience and skills, they tend to cut back on the number of people they employ, work hours, and other forms of compensation such as job training and/or fringe benefits. In some cases, businesses pass along the higher labour costs of the minimum wage to customers in the form of higher prices, which, perversely, has a disproportionate impact on the poor.

Crucially, unlike minimum wage hikes, the CWB does not artificially raise costs for employers and therefore does not have the same economic drawbacks.

Not that the CWB is perfect. It could discourage some recipients from working because, over a certain income level, benefits are reduced for every extra dollar earned. Losing the cash transfer may discourage some recipients from working and earning more income. However, the federal budget takes steps to mitigate this problem by lowering the benefit reduction rate from 14 per cent to 12 per cent—thus reducing the work disincentives for CWB recipients.

Overall, the CWB is a much better way to help the working poor than raising the minimum wage. If governments truly want to help the working poor, they should abandon any planned minimum wage hikes and focus on policies such as the CWB.

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