Reward work to help the working poor

Everyone wants to help the working poor. Unfortunately, governments across the country are going about it the wrong way by raising the minimum wage to $15. That misguided move does a bad job of targeting the people we want to help and produces a host of unintended consequences.

February’s federal budget, which made changes to the Working Income Tax Benefit — now renamed the Canada Workers Benefit — features a better way to help the working poor.

While the CWB has been around since 2007, it doesn’t receive the attention it deserves as an effective policy tool for helping the working poor. The budget proposes to enhance the program, which will almost certainly do more to help the working poor than minimum wage hikes, including in Ontario, Alberta and British Columbia.

The CWB provides cash transfers to working Canadians below a certain income level. Basically, the program encourages labour participation by rewarding work. The evidence from a similar program in the U.S. (the Earned Income Tax Credit) suggests this type of program boosts participation in the workforce.

With the enhancements announced in the budget, couples or single parents with family incomes below $36,483 will receive a maximum annual benefit of $2,335, while single workers making less than $24,111 will receive a maximum of $1,355.

The family income threshold for receiving benefits is a critical feature of the CWB. It means the program targets working families that have relatively low income.

In contrast, the minimum wage doesn’t efficiently target low-income families, since 88 per cent of minimum wage earners in Canada don’t live in low-income households, as defined by the Statistics Canada’s low-income cut-off.

While this may sound counterintuitive, the reality is most minimum wage earners aren’t the sole or primary earners in their households. Typically, they’re young people living with their parents or they have an employed spouse.

This highlights the fundamental problem with the minimum wage: It’s not a well-targeted anti-poverty tool. The CWB does a much better job of ensuring families with relatively low income benefit from the policy.

A higher minimum wage doesn’t just ineffectively target the working poor. It also makes it harder for less-skilled workers to find work. When employers are forced by government to pay higher wages to young workers with little work experience and skills, they tend to cut back on the number of people they employ, work hours and other forms of compensation such as job training and/or fringe benefits.

In some cases, businesses pass along the higher labour costs of the minimum wage to customers in the form of higher prices, which, perversely, has a disproportionate impact on the poor.

Unlike minimum wage hikes, the CWB doesn’t artificially raise costs for employers and therefore doesn’t have the same economic drawbacks.

Not that the CWB is perfect. It could discourage some recipients from working because, over a certain income level, benefits are reduced for every extra dollar earned. Losing the cash transfer might discourage some recipients from working and earning more income.

However, the federal budget takes steps to mitigate this problem by lowering the benefit reduction rate to 12 per cent from 14 per cent, thus reducing the work disincentives for CWB recipients.

If governments truly want to help the working poor, they should abandon any planned minimum-wage hikes and focus on policies such as the CWB.