City of Toronto should steer clear of a living wage law
The Toronto City Council recently voted unanimously to support a 20-year plan aimed at reducing poverty in the city. This could be a laudable initiative if council looks carefully at the evidence and avoids enacting policies that may do more harm than good.
Among the items in the plan is a commitment to encourage employers to pay a so-called “living wage” by giving preference to vendors who provide goods and services to the city and pay such a wage. What is precisely meant by “preference” is unclear. However, this commitment may be a step towards enacting a broader living wage law in the City of Toronto.
A living wage law would require private employers who do contract work for the city to pay their workers a certain wage. While this policy is often trumpeted as an effective way to reduce poverty, in practice a living wage law would do little to help the most vulnerable workers.
A living wage law is similar to a minimum wage in that it’s a government-mandated wage floor. But living wage laws apply to smaller groups of workers and typically require a much higher wage. The city’s plan specifically mentions a living wage of $18.52 per hour, which is 64.6 per cent higher than the $11.25 provincial minimum wage.
Living wage laws are rare in Canada—the city of New Westminster, British Columbia is the only Canadian municipality to enact one. But in the United States, more than140 municipalities have passed such policies. The American experience should serve as a cautionary tale for Canada.
The best and most rigorous research (summarized here) finds that a 100 per cent increase in the living wage reduces employment for low-wage workers by 12 to 17 per cent.
The evidence also shows that employers respond to living wage laws by hiring more qualified workers to justify the artificial wage increase while passing over those with fewer skills. This is a highly perverse outcome since less-skilled workers are presumably among the very people the policy is intended help. If employers end up hiring more productive workers who would have been paid a higher wage anyways, it defeats the purpose of adopting living wage laws in the first place.
Moreover, living wage laws are not an efficient anti-poverty tool, in part because the overwhelming majority of beneficiaries are not actually poor. In one study of seven major U.S. cities, researchers found 72 per cent of workers whose wage increased after a living wage law was implemented were not poor. Of the 28 per cent who were considered poor, only one-third moved above the poverty line.
Aside from the failure to generally help the poorest workers, a living wage law in Toronto would increase the cost of city services if the city absorbs the higher labour costs. That ultimately means higher municipal taxes or reduced spending on other services.
Toronto’s City Council has demonstrated a strong support for the goal of reducing poverty, and that is laudable. However, council would do well to look at the evidence and steer clear of a living wage law, which is not a very effective anti-poverty tool.
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