Fraser Forum

Who pays for the minimum wage?

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Imagine that you had no idea how you would turn out. You did not know your physical abilities, intelligence, family, or any other features that determine economic success.

Behind this “veil of ignorance” you could not know whether you would end up near the top of the income scale, near the bottom, or somewhere in between. Your fate would seemingly hinge on a roll of dice.

With an unfavourable roll of the dice you would be in the same position as many of the poor in Vancouver’s Downtown Eastside. They are there from circumstances beyond their control. They are victims of fetal alcohol syndrome, mental illness, abusive parents or childhoods spent bouncing from foster home to foster home.

Now imagine that behind this ignorance you could choose the support that society would offer to the least advantaged. What would you choose? If you, like most people, want to avoid risk, you would accept some lower limit to any person’s income as insurance against ending up among the least advantaged. You at the same time would be agreeing implicitly that society should offer some support to the least-favoured among us.

Many press for higher minimum wages to help the least advantaged. Still questions remain about their effects. Do they destroy jobs and if so, how many? Are they targeted at those most in need or do they benefit many who are not poor? Think teenagers in summer jobs.

These questions aside, there is further cost to raising minimum wages.

While it might not appear so, a higher minimum wage is effectively a tax. But it does not show up on the government’s books like other taxes. And unlike the income tax or the GST, the minimum wage tax has a very narrow base. It’s paid for in the first instance by employers in minimum wage industries through raised costs and by their customers through higher prices. Over the longer run, it falls more and more on the customers.

Edward Glaeser, a Harvard economist, judges minimum wages policies to be morally reprehensive because “the costs of [these] social-welfare policies [are}… paid for disproportionately by the customers and employers of lower-wage workers.” If indeed helping the least advantaged is a social objective, its costs should be borne by society as a whole.

Who then are the customers that pay this cost through higher prices?

Over half of minimum wage workers in Canada are employed in the trade industries (33 per cent), and food/accommodation industries (29 per cent). The product prices of these industries are raised by higher minimum wages.

With this distribution of minimum wage workers, people are unlikely to face these costs when they buy Bentleys, drink champagne, or shop at Holt Renfrew. Rather these costs more likely fall on those who eat fast-food and shop at discount stores.

A recent U.S. study examined who faces higher prices because of the minimum wage. As might be expected, higher income groups bear more of the cost on a family basis because, of course, they consume more. But as a percentage of family expenditures, the cost was highest for the lowest income groups—those customers who minimum wages are intended to help. To the extent that higher minimum wages raise prices, it’s ironic that a policy aimed at helping the least advantaged should be paid in part by the equivalent of a regressive tax.

Are there alternative ways for helping the disadvantaged that spread the costs more broadly? A negative income tax, or other forms of income support programs could be financed through general government revenues to avoid an unbalanced cost to a narrow group. Such programs have been supported by advocates on both the left and right of the political spectrum.

Income support programs can also benefit low-income groups such as the disabled, the elderly poor, and unemployed workers who do not benefit from the minimum wage. By providing general income support, these programs could also replace much of the ragtag collection of other programs administered by costly bureaucracies that offer targeted benefits to some disadvantaged people but not to others.

Alternatives to higher minimum wages face substantial headwinds. Bureaucrats may view policies that replace targeted programs as threats to their own jobs. Politicians may like higher minimum wages because they create an illusion that helping the poor can be costless. Politicians may also be reluctant to give up opportunities to trumpet the benefits of innumerable programs focussed on narrow interest groups.

Unless these pressures can be overcome, we will be stuck with continual pleas for a policy that may kill jobs, that benefits  many who are not poor, that misses many who are, and that is paid for unduly  by those it’s intended to help.

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