This and other releases are also available through the Internet at http://www.bcstats.gov.bc.ca Call (250) 387-0359 for details.

Small Business Quarterly u Second Quarter 2001

• The number of self-employed in BritishColumbia rose 3.5% from the first to thesecond quarter of 2001, almost regainingall the ground lost over the last year.This was despite a 2.1% drop in thenumber of self-employed persons withemployees of their own. The number ofself-employed persons without paid helpjumped 6.0% from the previous quarterto its highest level since the first quarterof 2000.

• The number of small businesses in Brit-ish Columbia (excluding self-employedpersons) was unchanged in the secondquarter compared to the same period in2000. Micro-businesses (i.e., those em-ploying less than 5 people) increased1.5%, but all other size categories expe-rienced some decline. Businesses with 5to 9 employees fell 1.7% and the numberof businesses with 10 to 19 employeesdropped 5.6%. The largest decline wasin the 20 to 49 employee category, whichfell 6.1%.

• New business incorporations were downalmost 9% in the second quarter 2001compared to the same quarter in 2000continuing a yearlong trend.

• Both business and consumer bankrupt-cies in the province fell slightly from thefirst to second quarter of 2001, but bothare still much higher than the same pe-riod a year earlier. Business bankrupt-cies were down 0.7% and consumerbankruptcies fell 0.8%, but were respec-tively 11.7% and 5.7% higher comparedto the second quarter of 2000.

• The prime rate dropped an entire pointbetween the second quarter of 2000 and

the same period in 2001. It fell 75 basispoints from the first quarter to the sec-ond quarter 2001 and has since declinedfurther. Despite the lower cost of bor-rowing, chartered bank business loans inBritish Columbia have continued toshrink, dropping 10.6% over the lastyear.

Employees in B.C. Small Businesses, *and Numbers of Self-Employed

'94 '95 '96 '97 '98 '99 '00 '01200

250

300

350

400

450

500(thousands)

* 'Small Business' = 1 to 19 employees

self-employed

small business employees

Contact: Dan SchrierTel: (250) 387-0376Release: November 2001Issue: 01-2

BC STATSMinistry of Management Services

SMALL BUSINESS QUARTERLY RELEASED NOVEMBER 2001 BC STATS 2

The Benefits and Costs of a Higher Minimum Wage

The recent changes to the British Columbiaminimum wage have rekindled the debateregarding its effects and effectiveness. As ofNovember 1, 2001, the BC minimum wagewas raised from $7.60 an hour to $8.00 anhour. In addition, a “first-job” wage rate of$6.00 an hour was established effective No-vember 15.

Supporters of minimum wage policy suggestthat not only does it ensure fair pay, but italso helps redistribute wealth to the poorestin society. Also, increases to the minimumwage can create incentives to enter the la-bour force.

Critics of minimum wage policy suggest thatthe minimum wage is a poor method of re-distributing income and it also tends to hurtthe very people it is intended to help. Theysuggest that hikes in the minimum wage in-evitably lead to reductions in employment asthe increased cost to business forces em-ployers to either reduce the number of em-ployees or at least cut the number of hoursper employee. Another argument againstraising the minimum wage is that, in BritishColumbia, it is already the highest in Can-ada, and higher than that of other nearbycompetitors. It is also suggested that mostof the beneficiaries of increased minimumwages do not reside in low-income house-holds. Rather, they are young people livingwith their parents, or second-earners in adual-income family.

There are numerous studies that examinethe effect of minimum wage increases onbusinesses and employment, but many ofthese studies have contradictory findings. Inreality, the effects of minimum wage in-creases depend on a large number of vari-ables, which means that the findings of anyone study may not be applicable to a par-ticular place or a particular time.

Employment Impacts

According to an OECD report based on a1998 study of minimum wage changes innine countries,

a 10% increase in the minimum wage isassociated with a 1½—3% decline in teen-age employment…The evidence alsoshows that hikes in the minimum, on theirown, can explain only a small fraction ofthe large falls in teenage employmentrates observed over the past two decadesin almost all countries. The cross-countryevidence suggests that the minimum wagehas no significant impact on overall em-ployment.1

This suggests that employment impacts de-pend on a variety of circumstances and it ismisleading to suggest that a raise in theminimum wage will necessarily lead to wide-spread job loss.

The impact on youth employment may bedue to businesses being able to attract moreexperienced workers at the higher wages,leaving less-experienced younger workerswith fewer opportunities. Another possibilityis that employers may find ways to do with-out some of the younger, less-skilled em-ployees, either by substituting capital or in-creasing the workload of other employees.

It has been argued that a lower trainingwage, like BC’s new first-job wage rate, maybe one way to help alleviate youth unem-ployment. The rate applies to the first 500hours worked in any job. Once a person hasrecorded 500 hours of employment, anyfurther work they do, for either their currentemployer or a future employer, must be paidat least at the regular minimum wage.

Proponents of this wage rate, like the BCRestaurant and Foodservices Associationand the Retail Merchants’ Association of 1 “Towards an Employment-centred Social Policy,”The OECD Observer No. 213 (August/September1998).

SMALL BUSINESS QUARTERLY RELEASED NOVEMBER 2001 BC STATS 3

BC, say that this lower training wage will en-courage the hiring of teens and enableyoung people with no experience to getwork.

Those against the new first-job rate, includ-ing various labour groups such as the BCFederation of Labour, suggest that the newwage rate is open to abuse. They point outthat there is nothing to prevent an employerfrom terminating an employee once theyreach 500 hours and hiring someone else atthe lower rate. They also suggest that somepeople may choose to take the lower rateeven though they have worked over 500hours rather than risk losing their job.

A differential minimum wage for younger,unskilled employees is also in place in On-tario, Nova Scotia and the territories.

Comparison with other jurisdictions

British Columbia’s minimum wage was al-ready the highest in the country before therecent increase to $8 an hour, but it is notnecessarily higher than rates in the UnitedStates. With a simple exchange rate com-parison, the United States’ federal minimumwage of $US 5.15 an hour is close to $8 aswell (using a Canadian dollar worth in therange of $0.62-$0.65 US dollars). In fact, inneighbouring Washington State, the mini-mum wage is $US 6.72 or about $10.35 inCanadian dollars (at an exchange rate of$0.65). There is a proposal to raise the fed-eral minimum wage in the United States to$6.65 by 2003. This is well over $10 an hourin Canadian currency at current exchangerates.

However, exchange rate comparisons ig-nore the differences in the cost of livingbetween jurisdictions. A better method forcomparing wages in different currencies isto examine their purchasing power parity(PPP). PPPs are rates of currency conver-sion that eliminate the differences in pricelevels between countries. Based on com-parative price levels developed using a July2001 PPP, the $8 BC minimum wage is wellabove the federal US minimum wage (ap-

proximately $6.44 after adjustment), but isstill below that of Washington ($8.40), Ore-gon ($8.13) and California ($8.44), as wellas some other states. A concept similar toPPP is not readily available to compare pro-vincial price levels, but based on StatisticsCanada studies of retail price differentials,the minimum wage gap is likely somewhatnarrower than it appears, although the BCwage would still be the highest in the coun-try.

A look at the minimum wage over time ad-justed for inflation using the Consumer PriceIndex shows that even at $8 an hour, theminimum wage is still significantly below itspeak in the mid-seventies. This means thatthe increased labour cost to businessespaying minimum wage has been less thanthe overall rate of inflation over the last 25years.

Inflation has eroded minimum wage

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Minimum Wage (1992$)

Although the evidence does not supportcomplaints that minimum wage hikes createserious disemployment effects and argu-ments about competitive disadvantages areless clear-cut than they appear, there is stillthe question of whether or not the minimumwage is a good tool for income redistribu-tion.

SMALL BUSINESS QUARTERLY RELEASED NOVEMBER 2001 BC STATS 4

Profile of minimum wage earners

Detractors of minimum wages argue thatraising the minimum wage will not help thepoor because most minimum wage earnersare middle-class teenagers living at home orsecondary earners in dual-income families.The profile of the minimum wage earnermay support this view, although the num-bers would have to be examined in moredetail to come to a definitive conclusion.

Based on Statistics Canada data, in 2000,61% of minimum wage earners in BritishColumbia were adults (i.e., over 19) and al-most 45% were over 25. Approximately twothirds of all minimum wage earners were indual earner families, and about 14% weresingle earners with one or more children un-der 18 years old.

Although there is little data available to ex-amine minimum wage earners by businesssize, a majority of the businesses in the in-dustries in which minimum wage jobs aremost prevalent are classified as small busi-nesses. The large majority of minimumwage jobs are in the service sector (88%),particularly in accommodation and food(30%) and retail and wholesale trade (25%).It is no surprise then, that the restaurant in-dustry is one of the most vocal opponents ofminimum wage increases, particularly sincemany of their employees receive tips tosupplement their wages and therefore areactually making more than the minimumwage. One approach to alleviate this con-cern that has already been implemented inQuebec and Ontario is to have a lowerminimum wage for those people who regu-larly earn tips to supplement their income.

Most minimum wage jobs are in theaccommodation & food or trade sectors

Goods12%

Trade26%

Accom & Food30%

Other Services32%

Alternative redistribution methods

The clear beneficiaries of minimum wagehikes are those workers earning minimumwage, but the main criticism is that many ofthese workers are in households with in-comes above the median, while thosehouseholds with no workers do not benefitat all. While higher minimum wages mayachieve the goal of ensuring fair pay, theymay also fail at the second goal of redistrib-uting income.

The BC Chamber of Commerce suggeststhat an alternative to raising the minimumwage is to offer more tax credits to lower-income families. The usual criticism of thiskind of strategy is that these families do notpay much tax, if any, to begin with. Anotherproblem with offering tax credits in lieu ofbetter wages is that it operates as a subsidyto businesses that pay lower wages, possi-bly at the expense of those businesses will-ing to pay higher wages.

The OECD suggests that policies on mini-mum wages and tax/benefit systems shouldnot be considered separately, but rather ascomplementary parts of an overall systemdesigned to redistribute income. An exam-ple of this would be to combine a minimumwage increase with a payroll tax deduction.This would have the effect of not onlyboosting the earnings of low-income work-

SMALL BUSINESS QUARTERLY RELEASED NOVEMBER 2001 BC STATS 5

ers, but also allowing them to keep more ofthat income instead of putting it toward pay-roll taxes. Also, it would offset the cost ofthe salary increase for businesses sincethey would no longer have to pay as muchin payroll taxes.

Of course, such a policy would have to beimplemented carefully. Too much of a wageincrease could not only lead to a reductionin employment for some portions of the la-bour force, but could also cause a signifi-cant rise in inflation. Too much of a declinein payroll taxes could leave the programsthey are supporting (such as the Employ-ment Insurance program) vulnerable todownturns in the economy.

Conclusion

The effects of changes to the minimumwage tend to be exaggerated by both de-tractors and supporters. There are manyfactors that must be considered in deter-mining the effect of a minimum wage in-

crease, including the size of the wage bump,the business cycle, the kind of tax andbenefit systems in place, and the laboursupply, just to name some.

This last item will become increasingly im-portant over the next decade. Demogra-phers agree that North America is facing alabour shortage in the coming years as theproportion of working-age population de-clines relative to that of retirement age. Thiscould make the entire minimum wage de-bate moot, as employers will need to raisewages to attract scarce labour.

On its own, a minimum wage hike may notbe the best method of redistributing incomeand may actually have some disemploymentimpacts on the younger members of the la-bour force. A policy that combines an in-crease to the minimum wage with a declinein payroll taxes could have benefits for bothlow-income people and small business.

SMALL BUSINESS QUARTERLY RELEASED NOVEMBER 2001 BC STATS 6

Feature Articles Listed by Issue Number

01-1: ‘Small Business On-Line: InternetUse Among SMEs’ (released Sept. 2001)

00-4: ‘Co-operatives Grew SteadilyThroughout the 1990s’ (released May 2001)

00-3: ‘Profile of Self-Employed in BritishColumbia’ (released Mar. 2001)

00-2: ‘Latest Small Business EmploymentNumbers Show Three Year Changes’ (releasedJan. 2001)

00-1: ‘Some Distinctive Features of TheSmall Business Workplace’ (released Oct. 2000)

99-4: ‘Transfers of Corporate Charters toOther Provinces Suggest Business Migra-tion From British Columbia’ (released July 2000)

99-3: ‘755 Thousand British ColumbiansRely On Small Businesses For Jobs’ (releasedMar 00)

99-2: ‘A Quarter of All Employees In BritishColumbia Work For Small Employers’ (releasedNov 99)

99-1: ‘Self-Employment InBritish Columbia Takes On New Profile’ (re-leased Sep 99)

98-4: ‘Co-Operative Movement GrowsThrough the 1990s’ (released Apr 99)

98-3: ‘The Long and the Short of WorkingHours For Self-Employed’ (released Dec98)

98-2: ‘People Trying Self-Employment AsA Second Job’ (released Aug 98)

98-1: ‘British Columbians Still Making TheirOwn Jobs’ (released May 98)

97-4: ‘Business Bankruptcies Ease WithLow Interest Rates, But Consumer Bank-ruptcies Continue to Climb’ (released Mar 98)

97-3: ‘Co-operative Movement GrowsSteadily In British Columbia’ (released Jan 98)

97-2: ‘Doing Our Thing In Lotusland − TheNew Self-Employed In British Columbia’ (re-leased Sep 97)

97-1: ‘Immigrants Boost Self-EmploymentIn British Columbia’ (released Aug 97)

96-3: ‘Changes in Business ConfidenceExpressed In Numbers of New Incorpora-tions’ (released Mar 97)

96-2: ‘Bankruptcies Rise With Self-Employment and Mounting Consumer DebtLoads’ (released Oct 96)

96-1: ‘Counting the Business Communityin British Columbia’ (released Jul 96)