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Should We Subsidize Work?

Government wage top-ups could spell the end of the working poor. Last in a series on anti-poverty policy ideas.

Katie Hyslop 16 May

Katie Hyslop writes about education and economic sustainability issues for Tyee Solutions Society.

This article was produced by Tyee Solutions Society in collaboration with Tides Canada Initiatives (TCI). TCI neither influences nor endorses the particular content of TSS' reporting. Other publications wishing to publish this story or other Tyee Solutions Society-produced articles, please see this website for contacts and information.

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Sue Collard makes barely above minimum wage after six years in retail. Should society top up her pay? Photo: K. Hyslop

As of this month, Sue Collard makes one dollar above minimum wage. Even after six years at the same retail job in north Surrey, she isn't surprised her salary remains low.

"The bottom line is, retail jobs do not pay. The justification is we need to be competitive -- isn't that always the justification?" she asks.

On paper Collard is above the poverty line for her three-person family. She works four days a week for more than minimum wage. Her partner has a full-time job in sales at an insurance company. She has one child to take care of, a 19-year-old son from a previous relationship.

But the family is only squeaking by on about $46,000 per year. When Collard isn't working, she's trying to home-school her son to complete his Grade 12. Various psychological and developmental problems keep him at home, out of school and unemployed.

But she says there are no government supports available for his education and care. And they make too much money to qualify for tax benefits. The family is perpetually strapped for cash, unable to afford emergency expenses.

"We use our credit cards probably too much, mostly for emergency situations which unfortunately crop up with greater frequency than one would like. I'll give you an example: in the past four months there's been a car breakdown, dental, and two emergency vets," she told said. Collard estimated she's spent between $5,000 and $6,000 on emergencies so far this year.

Insurance only covers 50 per cent of the family's dental costs up to a ceiling. Collard's job carries no health benefits. She's already used up her three days of annual sick leave.

Put simply, Collard needs to make more money.

Raise the Rates, a coalition of anti-poverty activists in Vancouver wants the minimum wage bumped to at least $12 an hour and BC NDP leadership hopeful Nicholas Simons campaigned last year in part on a promise to meet that demand if he led an NDP government. The party chose Adrian Dix -- who supports the present rate -- as its leader.

In any case, merely forcing employers to pay more incurs its own undesirable consequences. It puts financial pressure on small businesses. In turn businesses put pressure on government, typically arguing that raising minimum rates will lead to fewer people working -- at any wage.

If raising the wage is too expensive for small business, and politically risky for politicians, where does that leave people like Collard?

Economists like Krishna Pendakur from Simon Fraser University say that one answer is for other taxpayers, through the government, to top-up their poorest neighbours' paychecks to a more livable level.

The idea, Pendakur says, is for the public to subsidize minimum wages with "more (money) than the market would have delivered to typically low-skilled people."

We actually do this now in Canada, to a modest degree. We have the Working Income Tax Benefit (WITB), which provides a small tax benefit to low-income workers issued four times a year. Several provinces also offer their own supplements for low-income workers, often as part of their provincial poverty plans.

We've even experimented with larger subsidies. The Self-Sufficiency Project (see sidebar) of the early 1990s supplemented wages for thousands of single parents in B.C. and New Brunswick as an incentive to stay off welfare. The United States offers the Earned Income Tax Credit, a similar program for low-income families with children.

Those who favour wage subsidies argue we need to increase and broaden our subsidies if they're going to help low-income workers like Collard. But the counter argument is the economic pressure it puts on government. Number crunchers like Michael Mendelson of the Caledon Institute believe tax dollars should instead go to increasing benefits like the Canada Child Tax Benefit and the WITB, and that subsidizing a low-wage economy will make poverty worse on all of us.

Raising the return to work

Previous articles on the 'living wage' and a guaranteed annual income foreshadowed Pendakur's criticisms of those policies' ability to reduce poverty. An economist who researches the social costs of poverty and homelessness, he believes the way to bring the working poor out of poverty is a government wage subsidy.

As Pendakur would have it, British Columbia's minimum wage would remain in place, but the federal or provincial governments would pay a small subsidy to workers making that rate. As their 'market' pay rate increased above the legal minimum wage, the public subsidy would decrease.

For example, if someone earns $10.25 an hour -- British Columbia's new minimum wage -- the government could add $5 per hour to that cheque. If they get a raise to $11.25, the subsidy goes down to $4 per hour, and so on.

"I like low-wage subsidies because they raise the return to working. And working is good," Pendakur said. "Not just because I'm a Protestant who loves work -- but because working now makes it easier to work later.

"Long spells of unemployment are correlated with yet-longer spells of unemployment: there's a 'stickiness' to your labour market attachment. So if we want to live in a society where people, throughout their lives, work, then it can be advantageous to subsidize that work so that they do it."

He says subsidies could start with small wage subsidies, a dollar or two per hour, to take into account the possibility of fraud. If government finds fraud is rare, the subsidies could increase.

It's not such a far-fetched idea. Pendakur compares it to America's Earned Income Tax Credit, which provides low-income families with children a tax benefit to assist with social security costs and keep them in the workforce. It's an expensive program that cost the U.S. government $36 billion in 2004. The money that the program's beneficiaries pay for goods and services, however, cycles through the economy and tax systems, offsetting at least part of that cost.

The Self-Sufficiency Project

Canada already has a small government wage subsidy program in the WITB for low-income workers. In order to qualify for the supplement in B.C., a family must make less than $27,513, while single parents must earn below $19,153. For Vancouver, the income thresholds are less than every low-income cut-off except that for individuals.

WITB isn't Canada's only foray into subsidizing wages. Several provinces also offer modest working income supplements for low-income or unemployed workers, some as a part of an overall provincial poverty reduction strategy. B.C. has a Confirmed Job Supplement for welfare recipients who can't afford the transportation or work-related items required to start a job. There are also a few supplements for people with disabilities going through job training and temporary or part-time work.

But the first experiment with a national program was the Self-Sufficiency Project (SSP) (see sidebar). Beginning in the early 1990s it subsidized the income of thousands of single parents. Tested in British Columbia and New Brunswick, it was designed to get people who could work off welfare.

In a 2003 report, the Social Research and Demonstration Corporation concluded the program had paid for itself. Increases in tax revenues and a reduction in welfare enrolment covered most of its cost. The report added that if something like the Self-Sufficiency Program were fully implemented, welfare costs would likely continue to decrease over time.

"There were gains for parents in terms of income," says Reuben Ford, research director for the Social Research and Demonstration Corporation. At they same time, researchers "were also testing for how children would fare. And the mid-range age children -- ages four, five and six -- were seeing gains in their vocabulary tests and skills, because they were probably spending more time at daycare," Ford said.

Ford told the Tyee Solutions Society he would have recommended the SSP go nation-wide at the end of its test run almost 10 years ago. But he fears there are fewer people on welfare today capable of finding high-paying jobs.

Welfare numbers have decreased significantly in B.C. since the Self-Sufficiency Project began. In 1995, for example, the number of people on social assistance across the province classified as "expected to work" was 293,710, equal to almost half of Vancouver's population today.

In comparison, the number of those "expected to work" this past February was just 48,716, a significant decrease in the number of people who would benefit from a program like SSP today.

Carin believes the program would still work, an SSP-type benefit would still be a difficult sell. In order to avoid what he calls the "poverty trap," where benefits are clawed back when people make higher wages, some middle-class workers who don't need help will have to get subsidies, too.

"It means people earning $40,000-$60,000 who are not your targets are still going to be getting benefits. It's going to be expensive because some of the money has to go to people you don't intend it to go to," he told the Solutions Society.

Even if a national wage subsidy program could in theory pay for itself, that doesn't mean any government is going to soon give it the green light.

"The problem the department of finance has in any government," Carin says, "is they have a bunch of people coming to them that say 'I have a project idea with a great rate of return.' But they can't finance everything with a positive rate of return.

"The burden on somebody promoting an idea like this is you have to argue not only can it pay for itself, you have to argue that the rate of return is even higher than (competing policy ideas) that pay for themselves."

Subsidizing a low-wage economy

The Caledon Institute envisions wage subsidies as part of its "New Architecture for Adult Benefits," a re-imagining of the social safety net for working-age Canadians. In its model, subsidies exist in addition to a higher minimum wage, government tax benefits and strict employment standards for low-wage workers.

But Michael Mendelson, a senior scholar at the Institute, argues that Pendakur's idea for subsidizing low-income jobs could be dangerous for the economy.

"You're going to be distorting the economy so that you've got an over-investment in low-wage jobs," he says, comparing the idea to subsidizing the price of oil.

"Not only will it be a low-wage economy, but the price of the products that people pay for goods and services produced by low wages will be (reduced by) an implicit subsidy paid by taxpayers rather than the purchaser. You can't have low levels of poverty in an impoverished economy with low wages."

Mendelson would rather improve tax benefits, like the Canada Child Tax Benefit, which goes to all Canadians with children whether they're employed or not, or the WITB, in addition to enacting other elements of the institute's imagined safety net. He estimates the total cost of the institute's plan could have been covered by the two percentage point cut in the GST rate introduced by the Conservative government over 2006-2008.

Pendakur is not against expanding tax benefit programs in addition to a wage subsidy. In fact he says that would be one of the cheaper ways of introducing more money into poor people's pockets, because it does not require a large government overheard.

"We could totally expand those things, it would be trivial. It's like a few lines of code. You don't have to pay an administrator, the entire system is already there," he says.

But he isn't holding his breath for an increase under the current government, saying much of what holds back poverty reduction isn't an absence of means, but a lack of political will: "If you just want to raise the payments or raise the threshold it's trivial, all you have to do is pay for it. But are federal Tories going to do that? No, they don't care. It's not their thing," he says.

"My belief is that politicians do not think it's politically salable to make the lives of poor folks any better. It's totally feasible, no problem. The problem is politicians believe the voters don't want to do this stuff."

They may be right. If Canadians are indeed as concerned as Pendakur believes about the effects of poverty, it's clear government isn't getting the message. A wealthy country like Canada could afford a more equal society. But Canadians would need to decide that they'd rather pay to prevent poverty today, than face a larger tab later on.  [Tyee]

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