Jonathan Barazzutti

For years, there have been discussions on the news about Calgary’s “living wage” and why it demonstrates that Alberta’s minimum wage is too low. Most recently, the living wage, or the hourly wage a worker needs to earn to have a modest standard of living post taxes and transfers, was calculated to be $24.45 per hour in Calgary. This stands in contrast to Alberta’s general minimum wage, which is $15 per hour, or about 40 percent lower. Because the minimum wage is insufficient to earn a modest standard of living, many argue that the minimum wage should hence be increased.

However, the notion that increasing the minimum wage would enable people to earn a living wage assumes that there would be no unintended consequences of such an increase. Introductory microeconomics teaches the competitive model of minimum wages. Under this model, an increase in the minimum wage leads to a surplus of workers in the labor market, where the supply of workers increases while the demand for workers by firms decreases. The reduction in demand for workers occurs as a consequence of the increased cost of hiring each individual worker. The competitive model says that the minimum wage reduces labor demand and thus increases unemployment in the economy. Those who get unemployed are ultimately harmed by the minimum wage policy, and are further from earning what the minimum wage intended for them to earn.

While this is the model that any economics student is familiar with, it is no secret that the model doesn’t perfectly map onto the real world. That it doesn’t is why despite the competitive model predicting for certain a decrease in employment from a minimum wage increase, when polled economists are significantly more split on the issue. Meta-analyses on the minimum wage likewise suggest that the minimum wage only slightly increases unemployment, if at all. The competitive model, although useful, cannot explain the entirety of the story on the minimum wage.

The other major model used to explain the effects of a minimum wage is the monopsony model. The monopsony model suggests that labor markets are characterized by market power, where firms thus have the ability to set wages, and deliberately avoid purchasing labor until the equilibrium level to keep wages low. Under this model, the minimum wage might actually decrease unemployment as it would bring the labor supply closer to the equilibrium price and quantity. The absence of a strong negative effect of the minimum wage on unemployment may be explained by the presence of competitive and monopsonistic pressures, and perhaps also certain aspects of firm institutional behavior.

However, there are certainly some examples in which a sufficiently high minimum wage would increase unemployment. Suppose the minimum wage was set to $50/hour, or $200, or $1000. At some point, firms simply cannot afford the existing labor they have, and thus unemployment will increase. The economist Arindrajit Dube assessed that across American states, the negative employment effects of the minimum wage are small up until they hit around 59 percent of the median wage of an area.

Statistics Canada contains data for Alberta’s hourly wage rate separated by union status. Depending on what union status one looks at, in 2024 Alberta’s average hourly wage rate for both full- and part-time employees is between $35.52 and $38.66. These numbers are likely above the median hourly wage rate, given that the distribution of wages in Alberta is probably skewed right, meaning that the average wage will be greater than the median wage. 

To try and roughly correct for this, I’ll perform some back-of-the-envelope calculations. Statistics Canada also provides data comparing the average and median income up to the year 2022. In 2022, the average income in Alberta was $61,500, while the median income was $45,200. We can use the ratio between Alberta’s average and median income as a proxy for the ratio between Alberta’s average and median wage, and use that to approximate the median wage in Alberta. Using these numbers, Alberta’s median income is approximately 73% of Alberta’s average income. Applying this to the range for Alberta’s average hourly wage rate, we get a median hourly wage rate between $26.11 and $28.41 per hour. Then, using the benchmark of minimum wage effects being small up until they hit around 59% of an area’s median wage, the cutoff for when a minimum wage begins to have substantial negative employment effects is around $15-17/hour. 

This is essentially spot on for where Alberta’s minimum wage currently is, being $15 an hour. It is possible that these calculations contain some biases I’m not aware of. For example, the ratio between median and average income may be larger than the ratio between median and average wage, which would drive up the estimated cutoff range. Certainly a possibility, but probably not one that would significantly affect the results shown here. If you do want to prove me wrong, feel free to do so and send me the methodology and results.

So the minimum wage as it exists is probably at a safe value where it won’t significantly increase unemployment. The living wage, while an interesting concept, falls into the issue of presupposing the solution to the problem in its framing of the problem. The problem at hand is poverty, and while the minimum wage can help with that, it cannot be seen as the means of poverty alleviation or even as the primary means of poverty alleviation. Beyond the issue of employment effects, the minimum wage is ineffective at targeting the poor. When only a minority of households affected by the minimum wage are actually poor, the minimum wage fails to address socio-economic problems families face to any large extent. Instead, attention should be given to other issues, such as changing taxes and transfers or modifying regulations.

For example, as I argued in my article “On the Optimization of Social Services”, the social welfare programs that positively affect the poor while also paying for themselves the easiest are programs which target low-income children throughout childhood. While this doesn’t directly affect the parents’ incomes in poor households, it has a significant indirect effect through offsetting the costs associated with raising children. A mature conversation on how to alleviate poverty asks how to utilize all policy instruments to the fullest of their capabilities, and does not presuppose that there are simple or easy answers to the problems society faces.