The Impact of A Minimum Wage Increase: Ontario Government Announces an Increase to $15

The Ontario Government announced its bid to increase the minimum wage to $15 per hour by 2019, planning “to create better jobs and fair workplaces.” This plan is in line with the Government’s persistent message of fairness in its policies. The justification is that “Ontario’s economy has outperformed all G7 countries in real GDP growth over the past three years, and unemployment is at a 16-year low. But the nature of work is also changing. People are working longer, jobs are less secure, and benefits are not the same as they used to be. Many employees are working long hours and still struggling to support their families on the current minimum wage of $11.40.”[i]

From an economic perspective, the effect of a minimum wage is complex, but one thing appears certain: There is little evidence that suggests the minimum wage actually reduces poverty. And in fact a lot of the evidence suggests quite the opposite.

Among the propositions arising from the evidence is that the minimum wage ineffectively targets low-income households and it has adverse employment effects. In addition, minimum wage increases make it more difficult for young people to gain work experience while they are likely to be able to afford to earn less.

In 2016, Statistics Canada reported on the minimum wage, finding that 63 percent of those earning minimum wage were under 24 years old, and that only three percent worked full-time.[ii] The people most likely to earn minimum wage have less work experience and skills, and less on-the-job responsibility, which is typical of part-time work. In light of this finding, if one accounts for social mobility and the increase in skill that comes with experience, the majority of workers affected by the minimum wage don’t even need a minimum wage increase. Indeed, the minimum wage potentially harms these people.To see this possibility, consider the theory.

To see this possibility, consider that an increase in the price of labour decreases the quantity demanded of labour. This idea seems reasonable enough. But of course, there are twists, as a wage increase might increase employment in one case: where there is a single buyer of labour and the minimum wage is below the competitive market price of labour, though this is a limited circumstance. Without doubt all the economic effects are more complicated, especially considering the diverse empirical evidence compiled over time. Yet, the empirical evidence confirms the theory above to a large extent.

For people under 24, increases in the minimum wage cause increases in unemployment.[iii] This finding is the most consistent of all the findings made in studies of the minimum wage, though researchers have made many other claims as well. One study has found that, paradoxically, minimum wage increases could result in decreases in household income and increases poverty and unemployment, for example.[v]  No study has found positive employment effects from increases in the minimum wage.[iv] Though it is safe to say the record is replete with findings of increased unemployment and decreased social welfare, it is crucial to be careful with these results given the difficult task of measuring economic phenomena. Some studies have found that no relationship exists between employment levels and minimum wages.[vi]  Others still suggest that higher wages increase aggregate demand which in turn stimulates the economy. And some even advance ostensibly compelling humanities arguments for a “decent” wage.[vii] 

In regard to the contrasting studies noted above, the studies that find no relationship between minimum wages and employment use rudimentary methods, such as a single variable regression applied over areas with different minimum wages, and the studies do not control for the effects of a growing economy, or they use inadequate control groups. They use the most basic techniques taught in first-year economics and statistics courses. Because of the rudimentary methods used, these studies are as likely to imply that employment levels rose because of innovation and economic growth despite an increasing minimum wage, as they are to imply that the increases in the minimum wage have no effect on employment.

Notice that almost all the studies that find no minimum wage-employment relationship are studies conducted in the United States. It should be noted economists prefer conducting these studies in Canada because, in Canada, the minimum wage is a provincial matter, rather than a federal one, meaning that one can assess minimum wage increases in one province against a fixed minimum wage in another province. This method arguably leads to more robust empirical results.

At best, the studies that suggest increasing the minimum wage has no effect on employment rely on the increase being “modest”. That is, the studies that find no relationship between minimum wages and employment levels appear to concede that if the increase is immodest, then there is a negative effect. “Modest” in this context is surely less than the 30% increase imposed by the Ontario Government’s legislation.

The proposition that a minimum wage increase will boost aggregated demand is also interesting. If increasing the minimum wage boosts aggregate demand, why don’t we raise wages to $30, or $100? If only it were that simple. Sure, in certain contexts, an increase in wages can boost employee morale, or productivity, depending on the work culture, the employer’s management strategy, and other factors specific to a workplace, but to infer a general economic relationship from this circumstantial evidence is dubious. Why, for example, does productivity in Canada consistently lag productivity in the United States if boosting minimum wages raises productivity? Ontario, economically and culturally, is not radically different from the United States, yet a lower productivity persists in Ontario relative to the United States despite repeated increases in minimum wages in Ontario.

All the studies I have seen that suggest increasing the minimum wage will increase aggregate demand rely on tenuous theory and anecdotal evidence. The conclusions are simply not robust and must be scrutinized carefully before relying on them to set economic policy.

Finally, with regard to arguments for a “decent” or “fair” wage, what is “fair” about a $15 per hour minimum wage? No one has really answered this question. Why are we raising the minimum wage instead of giving citizens tools to make them more valuable than minimum? If there is a better way to improve people’s lives, why are we forcibly taking money from small, and large employers, who are people that work incredibly hard to innovate and deliver goods and services that people want? Certain employers might not agree that a particular worker has enough skills and experience to justify paying them $15, instead of, say, $14. If the work is inherently valuable, why isn’t the value of minimum labour $20? Or $30? Why is a $15 per hour minimum wage “fair”? The truth is that no one can answer that question because no one knows what “fair” is, particularly in a complex setting like the labour market.

The Ontario Government justifies its position by saying that the economy has outperformed the G7. But this outperformance could be caused by immigration and the increase in the labour force, a booming housing market, and a massive increase in household, business, and government debt. How does one infer from outperformance that all businesses must be doing so well that we can justify increasing their labour costs, whatever their particular circumstances may be? And why are people working less secure jobs? Could it be because the cost of hiring and employing people is becoming so large with all the regulations the Government has imposed, that it has become unprofitable to hire people in secure jobs? Businesses need profitability to survive. There is nothing immoral about that, to my mind.

And what relevance does the proposition that people are working “longer hours” have? How long is too long? All the people I consider successful work at least 50 hours per week, even though the Government considers 40 hours as full-time. When I was between 17 and 26, I believed it was wrong to work less than 70 hours a week, albeit I would hesitate to push myself to this degree again. I spent those years working “full-time” and studying full-time, while partying full-time, and never let a moment of my youth go to waste to idleness.

Though many people working minimum wage do not, and probably should not, have to work more than 50 hours weekly to make ends meet, they comprise a relatively small number of those that truly benefit from a minimum wage increase. If young workers, comprising the majority of minimum wage earners, want more money, they should work more hours, gain more skills, and make themselves more valuable employees. For the other people earning minimum wage, there are better ways to help them live a better life than by forcibly redistributing resources from employers. Alternatives to the minimum wage include the Working Income Tax Benefit, better primary and secondary education, or policies that promote income mobility.

In short, I am unconvinced by the Government’s position and its policy choice, and I hope you are too.

[i] https://news.ontario.ca/opo/en/2017/05/ontario-raising-minimum-wage-to-15-per-hour.html

[ii] http://www.statcan.gc.ca/pub/75-006-x/2014001/article/14035-eng.htm

[iii] http://www.aims.ca/site/media/aims/LabourSeries1.pdf .

http://economics.cornell.edu/sites/default/files/files/events/Meer_West_Minimum_Wage.pdf.

Terence Yuen, “The Effect of Minimum Wages on Youth Employment in Canada: A Panel Study” (2003) Vol 38 The Journal of Human Resources No 3.

https://www.fraserinstitute.org/sites/default/files/raising-the-minimum-wage-misguided-policy-unintended-consequences.pdf

[iv] https://lop.parl.ca/Content/LOP/ResearchPublications/prb0839-e.pdf.

[v] https://ideas.repec.org/a/eee/labeco/v18y2011i1p36-47.html.

[vi] http://www.nelp.org/publication/raise-wages-kill-jobs-no-correlation-minimum-wage-increases-employment-levels/.

[vii] http://canadianlabour.ca/sites/default/files/media/minwagecanada-2015-04-13%20%281%29.pdf.

 

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