'Living wage law' can hurt lower income earners says Fraser Institute report
As more Canadian municipalities consider adopting so-called living wage laws, a new report published today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank, concludes these laws can actually hurt low-paid workers.
The report, The Economic Effects of Living Wage Laws, reviews scholarly research on living wage laws in the United States, where more than 140 municipalities have the legislation, and spotlights the effects on employment, wages and poverty.
“The best available evidence from the U.S. serves as a cautionary tale for us in Canada about adopting living wage laws,” ,” said Charles Lammam, study author and resident scholar in economic policy at the Fraser Institute.
“When governments try to legislate wages, there’s typically a trade-off—while some workers may benefit from a higher wage, their gain comes at the expense of others who lose as a result of fewer employment opportunities.”
Living wage laws require private employers who do contract work for a city to pay their workers a wage that meets a living standard promoted by labour activists. Unlike minimum wage legislation, living wage laws cover smaller groups of workers and typically require a much higher wage.
In 2011, New Westminster, British Columbia became the first and only Canadian city to adopt a living wage law. At $19.62 per hour, New Westminster’s current living wage is nearly double the provincial minimum wage of $10.25.
Although activists claim living wage laws can increase wages with minimal costs, the reality is quite different. According to the best available research, a 100 per cent increase in the living wage (for example, going from an hourly minimum wage of $10 to $20) reduces employment among low-wage workers by between 12 and 17 per cent.
“Employers respond to living wage laws by cutting back on jobs, hours and on-the-job training. As a result, some workers lose employment income and the ability to gain valuable skills and experience,” Lammam said.
The report notes that employers also respond to living wage laws by hiring more qualified workers and passing over those with fewer skills thereby reducing the opportunity for less-skilled workers to participate in the labour market.
“Less-skilled workers are presumably among the very people living wage laws are supposed to help, but the evidence suggests these laws particularly hurt less-skilled, lower paid workers,” Lammam said.
In reviewing the effect of living wages on poverty, the report notes a study of seven major U.S. cities that found 72 per cent of workers benefitting from living wage laws were not actually poor.
Of the 28 per cent who were considered poor, only one-third moved above the poverty line.
“Living wage laws often don’t help the most poverty-ridden families, in part, because the overwhelming proportion of those benefitting from living wage laws tends not to be poor,” Lammam said.
Finally, the report cautions that the cost of living wage laws may be passed on to taxpayers.
“With higher labour costs for city contractors, there is the potential for living wage laws to result in larger city budgets and higher municipal taxes,” Lammam said.