Small Jump in BC’s Minimum Wage Makes Sense

March 13, 2015
Jock Finlayson

The province has decided to hike the statutory minimum wage to $10.45/hour, effective September 1, 2015. This amounts to an increase of 20 cents/hour from today’s level. Going forward, the government proposes to adjust the minimum wage based on inflation, as measured by changes in the all-items Consumer Price Index – an approach which the Business Council of BC has previously recommended. Assuming that inflation averages around 2% per annum, BC’s minimum wage can be expected to climb by a little over 20 cents per year. Within five years, it would be roughly $12/hour.

How will this affect the province’s economy? Low-income workers – 6% of all workers in BC currently are paid the minimum – can look forward to slightly fatter paychecks, which should provide a (very) small boost to aggregate consumer spending (note that low-income households spend essentially all of their income and save very little). The real purchasing power of the minimum wage will be protected under the new policy of inflation-indexing, thereby guarding against a situation where the real minimum wage is continuously declining, as has occurred across much of the United States.

For BC businesses that employ low-wage employees, the picture is more complicated. Labour compensation costs will rise slightly, and over time some small businesses are apt to step up efforts to find ways to operate using less labour. To the extent they do, there may be fewer low-wage, entry-level jobs available. But in thinking about the consequences for the job market as a whole, the academic research suggests that periodic, minor increases in the minimum wage don’t take much if any toll on labour demand, as discussed in a previous Business Council paper. At $10.45/hour, the BC minimum wage by September will amount to about 40% of the average industrial wage.[1] In relative terms, that is below where it stood a year ago, and also lower than in several other Canadian provinces.

Some labour organizations and anti-poverty groups have been pressing for a significantly higher minimum wage – $15 or even $18/hour. In some ways one can sympathize with arguments in favour of a substantially higher minimum wage as a way to improve the economic position of low-paid workers. However, pushing the prescribed minimum wage up by 50-75% from its present level would constitute a shock to the labour market and have broader economic ramifications. Obviously more workers would benefit, assuming they retained their jobs and hours. But many more employers would be affected, and among these a large proportion presumably would have strong incentives to find ways to economize on the use of (now more expensive) labour. Through the market-driven adjustment process triggered by a sharply higher statutory minimum wage, significant numbers of existing entry-level jobs would be at risk, as companies relying on relatively low-paid staff reduced their demand for labour, modified their business processes (e.g., substituted capital for labour), or went out of business altogether.

Modern economic research confirms that the effects of a higher minimum wage vary with the circumstances; they are not uniform across jurisdictions or time periods. In the context of the BC economy in 2015, the government’s decision to institute a 20 cents/hr increase in the minimum wage will be a small positive for low-paid workers, and it shouldn’t have a measurable impact on overall employment or the availability of entry-level jobs.

[1] As of December 2014, the average industrial wage was just under $25/hour.

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