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Written by: George Sroka
On October 1, 2017, Alberta’s government plans to increase minimum wage to $13.60 per hour. This is to fulfill its promise to raise minimum wage to $15.00 per hour by 2018. According to the Alberta Low Wage Profile publication (2016), the number of employees earning below $15 per hour decreased to 296,200, which represents 15.4% of all employees in Alberta. This gave Alberta the lowest percentage of low wage earners among all provinces in Canada.
Since the time minimum wages were first introduced in Alberta, there has been a debate about the economic costs and benefits of minimum wages. Before we look at the debate, we must understand and compare the real purchasing power of minimum wages. That is what could be purchased with a 1965 $1.00 minimum wage in relationship to the 2016 $12.20 minimum wage. The following graph shows the real purchasing power of minimum wage in Alberta from 1965 to 2016 and the forecasted real purchasing power in 2017 and 2018. Therefore, in 1965 we could purchase the equivalent of $7.50 in 2016 dollars. Clearly, Alberta minimum wage earners in 2016 were able to buy more than their counterparts in 1965.
The graph shows that this has not been a slow and steady climb. Real minimum wages in Alberta have seen a very bumpy ride. Real minimum wages increased during the 1965 to 1977 period. In fact, real minimum hourly wages in 1977 were almost equal to those of 2015. With only a few small increases to minimum wage coupled with continual high levels of persistent inflation in the early 80’s, real minimum wages took a heavy setback and started to decrease until 1986 when they dropped to a low of $8.00. For almost the next 20 years Alberta’s minimum wages remained relatively flat, reaching a low of almost $7.50 in 2004. Since 2004, real wages in Alberta have seen a huge comeback in line with economic activity in the province. 2015 marked the first time that real minimum wages surpassed the historical high set in 1977. When the Alberta government again raised the minimum wage in 2016 to $12.20, this again broke another historical high. In fact, given the Conference Board of Canada’s 2017 and 2018 consumer price index forecast for Alberta and the government’s promise to raise minimum wage over the next two years, real minimum wage is on pace to continue to set new historic highs at $13.31 and $14.38 respectively.
Knowing the historical real purchasing power of an hour in minimum wage and what to expect over the next two years, let us now review the economic arguments for and against raising minimum wage. The obvious benefit would be that the 296,200 employees earning less than $15 in 2016 would see an increase in their wages. However, this assumes all these employees continue to be employed. The counterargument says that employees who do not have a skill set sufficient to justify the higher wage will lose their job and become unemployed. Moreover, raising minimum wage will put pressure on other lower-paying jobs, which pay slightly more than the existing minimum wage. This is because these employees will lose their compensation for having an additional skill(s) over and above the minimum wage earner. This could cause stress in the entire compensation wage structure of small businesses, as these employees will want to regain their wage compensation over and above the new minimum wage.
This stress in the compensation wage structure of small businesses may be alleviated in one of several ways. First, since businesses will want to protect profit margins, some will try to pass on the additional wage costs by raising prices thus causing prices to rise in the economy. Second, what may occur is that some businesses will choose to reduce costs by either reducing employee hours or simply reducing the number of employees. The exact number of low wage earners that will lose their job has yet to be quantified.
Almost 60% of low wage earners are employed in two industries; retail trade, and accommodation and food services. The types of businesses in both industries are characterized as perfectly competitive where they earn zero economic profits. This means that their accounting profit is only sufficient enough to compensate a normal rate of return on invested capital. With the subsequent cost pressures of a higher wage structure, some businesses may choose to shut down and reinvest their capital in alternative industries where they could potentially earn a higher return on capital. In this case there would be no net economic loses just a redistribution of capital from one industry or business to another.
In summary, the increased compensation of low wage earners in Alberta will be somewhat offset by job loses, higher prices in the economy and capital flight from industries that rely on low wage labourers. However, the economic value of these changes remains to be estimated.
Written by: George Sroka, Instructor at Northern Alberta Institute of Technology
*What did you say about the minimum wage increase? CPHR Alberta’s Alberta Trends September 2015 features your opinions on the increase from our member survey. To see the results, click here.