Implementation of living wage policy leads to fewer jobs, hours, less training: Report

But supporters claim it’s a tool that can help people climb out of poverty
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 02/10/2014

In 2011, the City of New Westminster in British Columbia became the first — and only — Canadian city to adopt a living wage ordinance.

Under the ordinance, all firms that are contracted directly or subcontracted by the city to provide services on city premises must pay employees who perform the services a living wage — an hourly amount to cover basic expenses. The figure for 2013 for the lower mainland is $19.62 per hour, assuming no benefits are provided by the employer.

But this may not be the best approach, according to a report from the Fraser Institute, a research and educational organization, which said employers respond to living wage policies by cutting back on jobs, hours and on-the-job training. They also end up hiring more qualified workers at the expense of those with fewer skills in order to offset some of the higher wage costs.

“The evidence tells us when you move from say a $10 minimum wage to about a $20 living wage, you can expect employment reductions for people at the very low end of the skill and wage distribution anywhere between 12 and 17 per cent, so I think if we care about people that have the least amount of skills and low wages, the last thing we want to do is reduce job opportunities,” said Charles Lammam, a resident scholar in economic policy at the Fraser Institute in Vancouver.

When faced with an artificially higher wage, employers are going to hire the most skilled, most productive workers — and those workers are the ones who will be paid higher wages anyway, said Lammam, who wrote the report.

“The result then is people who have less skill, less education are the ones that will be passed on first because their productivity levels are not going to match the new wage rate mandated by government.”

In some cases, minimum wage increases or living wages actually hurt the people they’re intended to help, said Plamen Petkov, vice-president for Ontario at the Canadian Federation of Independent Business (CFIB) in Toronto.

“If a business owner cannot cope with the increases, they’ll have no choice but either to reduce hours, to lay off employees, not to extend contracts with contract employees — and usually those are the people who rely on minimum wage, so they end up being the ones who are really hurt,” he said.

“As opposed to really helping those who are dependent on a living wage or minimum wage, that’s not really the case or at least we don’t see sufficient evidence to support that. If there was evidence, then pretty much every city, every municipality would have been asking for a living wage right now. And that’s not really what we’re seeing here.”

In fact, the “overwhelming proportion” of those benefiting from living wage laws tend not to be poor, according to the Fraser Institute report The Economic Effects of Living Wage Laws.

And while living wage legislation may make them better off in terms of labour market earnings, they will experience a countervailing effect due to reduced eligibility for benefits from government social programs.

But Joan Burgess, director of human resources at the City of Westminster, said the living wage policy has been a positive experience — though it hasn’t had a quantifiable result.

“We are a fully unionized workplace and it was only a few positions at the lowest-paid level that were adjusted to meet the living wage. It hasn’t resulted in attracting more employees or a greater number of positions, it’s just been kind of status quo in that those few positions that were beneath the level of the living wage were adjusted to the living wage. I’m sure it has provided the opportunity to those employees that were provided with the living wage — it enhances their income and therefore, from an economic perspective, I’m sure they can spend a bit more. Do we actually see this? No.”

From a training perspective, the municipality provides training to all employees, as required within the scope of their duties, she said.

“We would not skimp on that training, regardless of the hourly wage being provided.”

And the city is careful about the number of positions it creates, working smarter rather than hiring new or creating new positions, said Burgess.

“I haven’t experienced, with the implementation of the living wage, within our municipality, an impact on the number of jobs we would create. And you have to remember these positions are at the lowest-paid level of an organization. Organizations are creating positions based on operational need — I’m not sure the living wage would really impact that.”

The Fraser Institute report looked at research done in the United States, where about 140 municipalities have a living wage policy. While there are some differences compared to the New Westminster situation, they’re fundamentally the same, said Lammam.

“The average roughly in the U.S. is around $12 per hour, there’s no one (that) has close to $20 per hour, so I would think that the adverse affects would be just as pronounced or likely even greater in Canada if other municipalities were to adopt the living wage that New Westminster has.”

If a living wage is implemented, that leads to some serious market distortions, said Petkov, citing CFIB’s own analysis. If the living wage for a municipality, for example, is $17 or $19, “it’s very difficult for a small business to compete on attracting and retaining employees if they’re not able to at least match that wage.”

Instead, alternatives to help low-income earners could include increasing the personal income tax exemption, so people have more disposable income, and offering investments in skills training, he said.

“Why do we make people dependent on minimum wage or living wage for their whole career? It was never meant as such a measure, (it was supposed to be) something you’re on for a temporary period of time until you get a better position,” he said.

The Fraser Institute also questioned the calculations behind the living wage rate and the definition of a “bare bones budget” — as determined by the Canadian Centre for Policy Alternatives — which includes parental education, a contingency fund, a used vehicle and entertainment.

“There’s some serious problems with the calculation, particularly when you compare the basic necessities calculated with other independent sources — it’s much higher,” said Lammam. “Most people will scratch their heads saying, ‘This is a comfortable living that we’re talking about, we’re not talking about ensuring people stay out of poverty. We’re talking about a comfortable living that a lot of Canadians would like to have.’”

But the methodology takes a localized, nuanced approach and looks at the most common expenses, the tax system and benefits, said Michael McCarthy Flynn, an organizer at the Living Wage for Families Campaign in Vancouver, which certifies living wage employers such as Vancity and SAP.

People with kids find it hard to get a loan or find the time to upskill themselves on their wages because there’s no capacity to save and no government support for training, said McCarthy Flynn.

“We’re saying that if we want people to work their way out themselves with a living wage, the wage needs to have the capacity to do that, so that’s where parents’ education comes in.”

And a contingency amount makes sense as a good budgeting practice to cover emergencies such as job loss, he said.

“The living wage budget has no capacity for saving so if we don’t have a contingency, which is only two weeks’ pay, that family goes into debt. So there’s no capacity to pay off the debt.”

The entertainment amount equals just one family outing per month said McCarthy Flynn.

“For us, living wage is something that somebody is able to live on, and living is being able to sustain yourself socially as well as the bare minimum.”

Most businesses and economists understand the benefits of being able to pay a living wage in terms of having a motivated and healthy staff and reducing turnover, he said.

“If you look at the social and economic costs of low wages… that is more than the costs of actually bringing people up to living wage.”

Poverty is a hugely complex issue, said Burgess.

“I don’t think the living wage answers or addresses the many complex questions or issues around poverty, such as education, housing, cost of living in various parts of the country. It is a social, remedial step that has come about and hopefully it does help some people.”

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