Indexing minimum wage rates becoming more popular

A growing number of governments across North America are using the CPI to adjust minimum wage rates
By Sheila Brawn
|Canadian Payroll Reporter|Last Updated: 03/10/2014

More employers in Canada may have to get used to yearly minimum wage changes as a growing number of governments look to annually index their minimum wage rates.

Alberta, Nova Scotia and Yukon already tie their minimum wage to economic indicators such as the consumer price index (CPI). Other provinces are now considering it.

The idea of indexing the minimum wage is not new, but it has been gaining momentum in recent years. A 2011 report — Restoring Minimum Wages in Canada by the Caledon Institute of Social Policy — notes that in 2003 the state of Washington was the only jurisdiction in North America that tied minimum wage changes to the CPI. Since then, not only have some Canadian jurisdictions embraced indexation, but another 10 American states have begun to do so, the most recent being New Jersey this past January.

Yukon was the first Canadian jurisdiction to directly tie minimum wage changes to inflation when it began to do so in 2007. It adjusts the minimum wage rate every April 1 based on the CPI for the previous year for the city of Whitehorse.

Alberta began tying its minimum wage rate to yearly increases in average weekly earnings in 2008. In 2012, it began making annual adjustments based on the CPI, as well. Minimum wage changes occur on Sept. 1.

In Nova Scotia, minimum wage changes occur every April 1. In 2012, the province began indexing its minimum wage to a measure called the low-income cut-off line. In 2013, it started indexing the rate to the Canadian CPI for the previous year.

Pat Parenteau, director of policy with Saskatchewan’s Ministry of Labour Relations and Workplace Safety, says there have long been discussions about how the minimum wage is set, but concern has become more prevalent in recent years. Labour groups are calling for minimum wages to be significantly increased and then indexed to inflation. Business groups are asking for a more transparent and stable process for setting minimum wage rates.

A driving force behind the change is the need for a wage-setting process that is more predictable and less political. In a recently released report on Ontario’s minimum wage, an advisory panel studying the issue said, "There is currently no formal process established in Ontario for increasing the minimum wage on a regular basis. The minimum wage is not tied to any economic indicator."

Based on more than 300 submissions the panel received, it said "there was near universal agreement on making the process of revising minimum wages more transparent, predictable, fair and arm’s-length from government’s own near-term concerns."

The concern about the current process being too "political" comes from the fact that in Ontario the government currently has the authority to decide when it will raise the minimum wage and by how much. This is also the case in British Columbia, Quebec and Nunavut. (In some other provinces, an independent board reviews the minimum wage rate and suggests changes. In the end, though, it is still up to the government to decide whether to go ahead with the recommendations.)

Liam McGuinty, manager of policy and government relations at the Ontario Chamber of Commerce, says the current ad hoc process in Ontario for setting the rate is the worst way to do it.

"You can get decisions being made based on political ideologies," he says, adding that "there can be really long periods where there are (minimum wage) freezes and then there are sudden increases."

This has happened in Ontario. The minimum wage was frozen from 1995 to 2003. From 2004 to 2010, the government increased the rate seven times. To stop this from occurring in the future, the panel recommended Ontario adjust the minimum wage every year at the same time by the same percentage as the change in Ontario’s CPI. It also suggested there be a full review of the rate and the process for setting it every five years.

In response, the Ontario government announced it would put forward legislation to tie future minimum wage changes to increases in the CPI. If passed, the law would require wage changes take place on Oct. 1, with government giving at least six months’ notice of the change.

Saskatchewan also likes the idea of using economic indicators to set the minimum wage. One of the benefits of doing this is that there is a formula for setting the rate and "at least some basis for making a non-partisan decision. It’s no longer a political tool," says Parenteau.

Saskatchewan has been informally doing this for the last few years. Even though it was not required to do so by law, Parenteau says when the government raised the minimum wage rate in 2011 and 2012, it tied the increases to the change in the CPI and the average hourly wage (another economic indicator) for the previous year.

The government plans to write regulations this spring to require the minimum wage be indexed to both of these measures, she says.

"Just relying on one indicator can skew (the minimum wage) so much," Parenteau notes, adding sometimes there are unusual spikes in the CPI from one year to the next. A second indicator helps to balance this out.

While regulations have not been finalized yet, Parenteau says she expects increases to the minimum wage would not be automatic — as they are in Alberta and Yukon. A consultation paper on labour standards changes suggested the Saskatchewan government index the minimum wage to these indicators, but added "Cabinet would continue to be the final decision maker."

In Newfoundland and Labrador, an advisory committee recommended in 2012 that the government adjust the minimum wage rate each year based on the previous year’s all-items CPI for the province. It suggested wage changes take effect on May 1 each year, beginning in 2014. So far, the government has not acted on the recommendation, but Darin King, the minister responsible for the Labour Relations Agency, said a further review of the minimum wage will come next year.

In New Brunswick, the government has said it plans to index the province’s minimum wage rate to inflation as part of its poverty reduction initiative, but has not yet announced any plans to do so. The last minimum wage hike occurred in 2012.

Although indexation has support in the business community, it is not unconditional or universal. The Newfoundland and Labrador Employers’ Council (NLEC) says while it supports measures to take the politics out of setting the minimum wage, "the NLEC believes a less volatile indicator than CPI be used and that the indicator should act as ceiling that government uses when setting minimum wage, and that they retain the right hold on minimum wage increases if necessitated by economic conditions."

The Canadian Federation of Independent Business (CFIB) says governments should not consider raising the minimum wage until they have tried to reduce poverty through other means, such as tax relief and training programs. In a submission to the Saskatchewan government, the CFIB said: "We oppose automatically tying Saskatchewan’s minimum wage to any economic indicator, as it assumes affordability every year and does not reflect current market conditions."

Even the Ontario Chamber of Commerce, which supports tying minimum wage to the CPI, says annual minimum wage changes could hurt employment by making it too expensive for employers to hire additional workers. McGuinty notes some businesses have expressed concerns that increasing the minimum wage could force employers to raise wages for employees who earn just above the minimum wage. Doing this annually could negatively affect businesses.

The Chamber also cautions there could be dangers with automatic adjustments tied to inflation.

"Increases to the minimum wage could still occur during economic downturns, as inflation can still rise during times of weak or negative economic growth," it said in a submission to the Ontario panel.

Governments need to look for the right balance when coming up with a wage-setting process, Parenteau says adding provinces often look to each other for solutions.

Whatever path a province chooses, Parenteau advises each jurisdiction to find the process that works best for it. "What works in Saskatchewan might not work in B.C., might not work in Alberta."

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