DIS

CUSS

ION

PAPE

RStatutory Review of the

Minimum Wage 2016

September 2016

Post-Secondary Education, Training and Labour

Statutory Review of the Minimum Wage 2016

Discussion Paper

September 2016

Published by:

Province of New Brunswick PO Box 6000 Fredericton NB E3B 5H1 CANADA

Printed in New Brunswick

PDF: ISBN 978-1- 4605-1047-6

10788

1

Statutory Review of the Minimum Wage 2016

IntroductionIn New Brunswick, workers’ rights are protected by the province’s Employment Standards Act. One of the rights is to be compensated at the legislated minimum wage rate or above.

The minimum wage rate in New Brunswick is currently set at $10.65 per hour. The Government of New Brunswick has committed to raising the minimum wage to $11 per hour by the end of 2017 and indexing it to inflation thereafter.

In 2014, the Minimum Wage Board in New Brunswick was eliminated and replaced with a requirement to conduct a review of minimum wage every two years, through which the Minister will review the amount of the minimum wage, the manner in which it is determined and the timeline for any changes to it.

This consultation is seeking feedback from employees, employers and others who may be impacted as part of the comprehensive review of minimum wage.

What does minimum wage do?

The minimum wage represents a wage floor, by setting the minimum amount that employers are allowed to pay employees. A wage floor protects the wages of workers who are usually the most vulnerable and who typically have no formal representation. It also prevents the undercutting of wages.

The minimum wage sets the lowest legal wage rate regardless of personal characteristics, income level or amount of employee experience.

The minimum wage often creates a benchmark for other wages. Employers who pay low wages sometimes measure their pay scales against the minimum wage rate. When the minimum wage is increased, some employers adjust other wages that are set slightly above minimum wage in a proportional fashion. If employers do not make adjustments to other wages when the minimum wage rate is increased, workers can lose their seniority pay, becoming minimum wage employees. Using the minimum wage as a benchmark can be negative if employers see it as the standard wage for low-skilled jobs, rather than the lowest legal wage rate.

Although the minimum wage is important to protect the wages of vulnerable workers who have little to no bargaining power, it also has limitations. Increases to the minimum wage lead to higher costs for employers and in some cases may have indirect impacts for employees over the long-term such as reducing employment, work hours or employee benefits.

The minimum wage rate is untargeted and may not be able to address some complex policy issues such as poverty and income inequality.

Who are the minimum wage employees in New Brunswick?

In 2015,1 there were 18,500 minimum wage employees, which represented six per cent of all paid employees in New Brunswick. This was down slightly from seven per cent in 2014. Many minimum wage employees live with family members and are often one of multiple wage earners in their household2.

1 Custom data from the Labour Force Survey, 2015. 2 Data on the family composition of minimum wage employees is from 2013.

2

Statutory Review of the Minimum Wage 2016

The majority of minimum wage employees are:

• Young (54 per cent between the ages of 15 and 24);

• Female (56 per cent);

• Employed part-time (54 per cent);

• Not unionized (97 per cent)

• Have little job tenure (50 per cent have been employed for less than 12 months).

In 2015, 68 per cent of minimum wage earners in New Brunswick were employed in sales and service occupations. More than one-third (34 per cent) of minimum wage employees were working in the retail trade sector and almost one-quarter were employed in the accommodation and food services sector (24 per cent). Although the majority (59 per cent) of minimum wage earners had a high school diploma or less, 28 per cent of minimum wage earners had completed post-secondary education.

Indexation of minimum wage to maintain the purchasing power of minimum wage employees

The Government of New Brunswick has committed to indexing the minimum wage after raising it to $11 per hour by the end of 2017.

The economic indicators often considered for indexing the minimum wage rate include changes to inflation3 and changes to average (or median) wages.

Indexing to inflation

Indexing the minimum wage rate to inflation would prevent the erosion of purchasing power of minimum wage employees as the cost of living increases.

When indexing to inflation the following options must be considered:

• Should adjustments be based on the change in total or core Consumer Price Index4 (CPI)?

• Should adjustments be based on the change in national CPI or provincial CPI?

Total CPI represents the change in all prices, while core CPI excludes the changes in the price of the most volatile goods such as energy and food products. Since energy and food products are essential elements to maintaining a basic standard of living, total CPI provides the best measure of changes to the overall cost of living.

Provincial CPI provides a better indication of changes to the cost of living in New Brunswick. The national CPI is influenced by price changes in other parts of the country where some goods (e.g., shelter) have different costs than New Brunswick.

Indexing to change in wages

Indexing New Brunswick’s minimum wage rate to changes in wages would maintain the ratio between the lowest wages and either the average of all wages or the wages that most people earn.

3 Inflation is the rate at which the level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

4 The CPI is an indicator of the changes in consumer prices obtained by comparing, through time, the cost of a fixed basket of goods and services purchased by Canadian consumers in a particular year.

3

Statutory Review of the Minimum Wage 2016

When indexing the minimum wage rate to wages, the following options may be considered:

• Should adjustments be based on the change in average (mean) hourly wage5 or median hourly wage6?

New Brunswick has the second-lowest average and median wages in Canada, after Prince Edward Island. During the last five years, the median wage in New Brunswick has increased by a very small amount. In an environment where wages are fairly stagnant, indexing the minimum wage rate to changes in average or median hourly wages would not necessarily reflect the health of the economy or the cost of living. For this reason, wages are not considered to be the best economic indicator for indexing the minimum wage rate in New Brunswick.

In other jurisdictions:

Indexing the minimum wage rate will make changes more predictable and transparent. Five of 13 jurisdictions currently index their minimum wage rates on an annual basis:

• British Columbia – percentage change in annual CPI for British Columbia;

• Nova Scotia – percentage change in the projected annual CPI for Canada in the preceding calendar year;

• Ontario – percentage change in CPI for Ontario for the preceding year;

• Saskatchewan – average of the percentage change in CPI and the percentage change in average hourly wage for Saskatchewan during the previous year;

• Yukon – annual increase for the preceding year in CPI for the city of Whitehorse.

Additionally, from 2011 to 2014, Alberta indexed its minimum wage rate to the average of the annual percentage change in CPI and average weekly wages in Alberta.

Recommended approach to indexing minimum wage in New Brunswick:

1. Index the minimum wage rate to provincial inflation as measured by the annual percentage change in total CPI for New Brunswick.

2. Round the annual minimum wage rate adjustment to the nearest $0.05

3. In the case of deflation in New Brunswick (negative change in New Brunswick CPI), keep the minimum wage rate status quo7.

Is the minimum wage rate at the right level? The labour market in New Brunswick remains weak as the provincial economy continues to be impacted by the recession that began in Canada in 2008. Since the start of 2015, the economy has been stalled, as both private and public sector investment in the province have been low, oil and other natural resources prices have fallen dramatically and the Canadian dollar has declined sharply relative to the U.S. dollar. Economic conditions need to be considered to determine whether the economy can handle an increase in the minimum wage rate.

5 Average hourly wage is the sum of all hourly wage rates divided by the number of employees with hourly wages. The average hourly wage rate can be affected by outliers (very low or very high hourly wage rates).

6 Median hourly wage is the hourly wage rate that represents the midpoint, at which half of all employees earn less and half of all employees earn more.

7 New Brunswick has not experienced negative CPI during the past 30 years.

4

Statutory Review of the Minimum Wage 2016

The majority of minimum wage employment (58 per cent) is found in the retail trade and accommodation and food services sectors. From January 2015 to January 2016, employment in trade and accommodation and food services sectors in New Brunswick increased by more than four per cent (+3,400)8. The GDP in these sectors also increased since the beginning of 2015. This means that despite a weak provincial economy, net employment levels have still increased in the sectors that employ the majority of minimum wage employees.

In December 2014, the minimum wage rate increased from $10 per hour to $10.30 per hour, and another increase on April 1, 2016, raised the minimum wage rate to $10.65 per hour. In recent years, minimum wage increases have kept pace with inflation without representing significant real increases.

During the past few years in New Brunswick, social and economic factors have been placing opposite pressure on the minimum wage rate setting decision. Minimum wage employees have been faced with increases in the cost of living while employers have been operating in a weak labour market and economy. Determining the appropriate minimum wage rate is complex. The first step is to determine the policy objective(s) that could prompt a rate change (if required).

How should the minimum wage rate be determined?

Determining the appropriate level for the minimum wage rate requires that the policy objective be identified and that economic and social factors be considered. A number of possible objectives behind the setting of minimum wage are explored below.

Objective 1 – Maintain the purchasing power of the lowest paid employees

The minimum wage rate increase in 2014 maintained the real value of minimum wage relative to 2012 without representing an increase in purchasing power, due to inflation. Between 2012 and 2014, inflation increased by nearly five per cent. From January 2015 to January 2016, inflation increased by 2.4 per cent. The minimum wage rate increase to $10.65 per hour represents a slight increase in purchasing power since recent inflation has been less than the increase in the minimum wage rate.

If the objective of minimum wage is to maintain the purchasing power of the lowest paid employees, recent increases (2012-2016) have successfully met the objective. Purchasing power can be maintained by scheduling additional increases that are at least as high as the projected increase in inflation or by indexing minimum wage to inflation in New Brunswick.

Objective 2 – Maintain the relative level of pay between the minimum wage and the median wage

In New Brunswick, the minimum wage as a percentage of median wage increased significantly from 2007 (46 per cent) to 2012 (59 per cent). During the last few years, the minimum wage as a percentage of median wage in New Brunswick has decreased (55 per cent in 2015). This means that, since 2012, minimum wage has not kept pace with the median wage, which is the rate at which one-half of New Brunswickers earn less and one-half earn more.

If the objective of minimum wage is to maintain the relative level of pay between the minimum wage and the median wage, then determine the appropriate distance between minimum wage and median wage and adjust the minimum wage as needed to maintain the ratio.

Determining the appropriate distance between the lowest wages and the wage that divides the income spectrum in half, requires a value judgment about adequate wages and levels of income equality. 8 Trade includes both retail trade and wholesale trade.

5

Statutory Review of the Minimum Wage 2016

An important consideration with this policy objective is that wages tend to be slow to move in New Brunswick. This option would not ensure that minimum wage employees maintain a certain standard of living.

Objective 3 – Keep pace with the minimum wage rates set in other jurisdictions

Minimum wage rate setting is a provincial responsibility that allows provinces and territories to consider their unique economic environments, cost of living changes and taxation systems. Despite the reasons for differences in minimum wage rates, there tends to be public pressure to stay on par with other parts of Canada.

As of April 1, 2016, Nunavut had the highest minimum wage in Canada at $13 per hour, followed by the Northwest Territories at $12.50 per hour. Since increasing the rate on April 1, 2016, New Brunswick’s minimum wage rate went from lowest in Canada to eighth-highest. The ranking of minimum wage rates across the country is somewhat arbitrary as jurisdictions make changes to the rates at various points in time and small changes can significantly change the ranking. The average minimum wage rate of all provinces and territories as of April 1, 2016, was $11.07 per hour.

The Government of New Brunswick has made a commitment to increase the minimum wage to $11 per hour by 2017. Six jurisdictions already have a minimum wage rate of $11 per hour or higher, and the Government of Alberta has committed to raising the minimum wage in Alberta to $15 per hour by 2018.

New Brunswick faces inter-provincial out-migration, especially among youth and skilled workers. Since 54 per cent of minimum wage earners in New Brunswick are youth between the ages of 15 and 24, keeping pace with the minimum wage rates in other provinces may have an impact on the retention of youth in New Brunswick.

If the obejctive behind setting the minimum wage rate is to keep pace with the minimum wage rates set in other jurisdictions, New Brunswick could consider raising the minimum wage to a rate higher than $11 per hour by the end of 2017. One option would be to increase minimum wage to the average rate in other jurisdictions by the end of 2017.

Since jurisdictions change their minimum wage rates at different points in time and often on an ad hoc basis, it would be difficult to keep the minimum wage rate at the average of all jurisdictions.

Objective 4 – Ensure that all New Brunswick employees working full-time are earning high enough wages to be above the low-income threshold

The estimated annual total wages for minimum wage employees ($16,891 per year before tax) is lower than all three low-income lines for an individual in New Brunswick9.

In Canada, three low-income lines are used to define thresholds and incidence of low-income:

1. Market Basket Measure – The Market Basket Measure (MBM) is a measure of low income based on the cost of a specific basket of goods and services representing a modest, basic standard of living. It includes the costs of nutritious food, clothing, footwear, transportation, shelter and other expenses for a reference family of two adults aged 25 to 49 and two children (aged nine and 13). It provides thresholds for a finer geographic level than the Low-Income Cut-Off, allowing, for example, different

9 Annual wage rate for minimum wage employees is based on the average number of hours per week worked in Sales and Service Occupations (2014), the minimum wage rate of $10.65 per hour and 52 work weeks per year.

6

Statutory Review of the Minimum Wage 2016

costs for rural areas in the different provinces. These thresholds are compared to disposable income levels of families to determine low income status.

2. Low-Income Cut-offs – The low income cut-offs (LICOs) are income thresholds below which a family will likely devote a larger share of its income to the necessities of food, shelter and clothing than the average family. The approach estimates an income threshold at which families are expected to spend 20 percentage points more than an average family on food, shelter and clothing. The low-income cut-offs vary by seven family sizes and five sizes of area of residence. This additional variability is intended to capture differences in the cost of living between community sizes.

3. Low-Income Measure – The Low-Income Measure (LIM) is a threshold representing a fixed percentage (50 per cent) of median adjusted household income, where “adjusted” indicates that household needs are taken into account. Adjustment for household sizes reflects the fact that a household’s needs increase as the number of members increases. 

In New Brunswick, nearly 100,000 people, which represents 13 per cent of the population, are living below the market basket measure10 low-income threshold. In various jurisdictions across Canada, poverty reduction plans have been developed to address the issue of poverty. Minimum wage rates have tended to increase as poverty reduction plans were introduced.

Poverty is a complex social issue and Canada does not have a defined poverty line, only measures of low-income. The research pertaining to the use of minimum wage to reduce poverty (or incidence of low-income) does not support the theory that minimum wage alone can reduce poverty. Decreasing the incidence of low-income requires a toolbox of targeted and complementary tools. Increases to minimum wage benefit individuals across a broad spectrum of standard of living. Although minimum wage employees are receiving the lowest legal hourly wage rate, many minimum wage employees are part of economic families with more than one income earner and as such, they are not necessarily part of low-income families.

Raising the minimum wage rate will not eradicate the incidence of New Brunswickers living below a low-income line, as not all minimum wage employees are living below a low-income line and not all low-income individuals in the province are employed.

If the objective of minimum wage rate setting is to ensure that minimum wage employees (working average hours) are earning high enough wages to be above the low-income threshold, the minimum wage rate would need to be increased; however, there would be challenges with this approach.

Challenges associated with trying to keep low-wage employees above the low-income line by adjusting the minimum wage rate include the following:

• Government does not control the demand for labour in the private sector. Minimum wage employees are already disproportionately working in part-time jobs. The average hours worked in sales and service jobs was 30.5 hours per week in 2014.

• Increasing the minimum wage rate enough to ensure that an employee working 30.5 hours per week is above the low-income line would be very costly to employers and would not be targeted to low-income families.

• The market basket measure is the low-income line with the most precise estimates of the cost of 10 The Market Basket Measure (MBM) is a measure of low income based on the comparison of the cost of a specific

basket of goods and services which represent a modest, basic standard of living to a reference family’s disposable income. It includes the costs of food, clothing, footwear, transportation, shelter and other expenses for a reference family of two adults aged 25 to 49 and two children (aged nine and 13) in areas of residence of various population sizes.

7

Statutory Review of the Minimum Wage 2016

maintaining a specific standard of living for various locations and family compositions; however, it is based on a comparison between a calculated level of disposable income and the cost of a basket of goods. Calculating the hourly wage rate required to get a minimum wage employee above the market basket measure threshold of disposable income would be very complex and require data that is not available.

If the objective is to ensure that all New Brunswick employees are living above the low-income line, an alternate tool or policy lever should be considered, such as a wage top-up program or a guaranteed annual income.

In North America and around the world, discussions are increasing around the concepts of guaranteed annual income or living wage in order to bring the standard of living for all employees up to a level that is determined to be adequate. These concepts and associated tools may be more appropriate than the minimum wage to ensure that all New Brunswick employees are able to enjoy an adequate standard of living and social inclusion. Further research would be required, including analysis into the determination of adequate income.

Options regarding how the minimum wage rate is determined:

1) Maintain the purchasing power of the lowest paid employees by increasing the minimum wage rate to $11 per hour by 2017 and indexing it to inflation thereafter as per the government commitment.

2) Maintain the relative level of pay between the minimum wage rate and the median wage by adjusting the minimum wage rate annually to maintain it at a certain percentage of the median wage. Determine what the target level of minimum wage as a percentage of the median wage should be.

3) Keep pace with the minimum wage rates set in other jurisdictions by increasing minimum wage to the average minimum wage rate among all jurisdictions in Canada by the end of 2017. Continue to adjust New Brunswick’s minimum wage rate annually to the average rate in all jurisdictions.

4) Ensure that all employees are earning high enough wages to be above the low-income threshold on an individual or economic family basis by introducing a targeted tool that is based on family income, such as a wage top-up program or a guaranteed annual income.

Further information

The New Brunswick Minimum Wage Factsheet provides information about minimum wage earners, cost of living and economic conditions in the province. It is available at: https://www.nbjobs.ca/report/wage

8

Statutory Review of the Minimum Wage 2016

How to provide feedback

This consultation will form part of the first comprehensive review of minimum wage. The Government of New Brunswick is looking forward to hearing from employers, employees and other New Brunswickers to provide feedback on:

• the proposed indexation approach; and

• how the minimum wage rate should be determined.

We welcome your comments, ideas and suggestions on this discussion paper and on the topic of minimum wage. Please provide your feedback to the Department of Post-Secondary Education, Training and Labour at:

Email: labour-travail@gnb.ca Telephone: 1-844-453-4155 (toll-free) Fax: 506-453-3780 Online: http://www2.gnb.ca/content/gnb/en/corporate/public_consultations.html

Minimum Wage Review Department of Post-Secondary Education, Training and Labour PO Box 6000 Fredericton, NB E3B 5H1

The deadline for submissions is Oct. 7, 2016.

Thank you for taking the time to participate.