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Liberals' Minimum Wage Laws: A Plan to Increase Approval Ratings in View of the Next Election?

On October 1st 2017, Ontario’s minimum wage rose to 11.60$ an hour, from a previous level of 11.40$ an hour. This minimum wage comes from a proposed plan of Ontario’s Liberal premier to ensure more security for its workers by the name of “Fair Workplaces, Better Jobs”.

The bill was proposed in May 2017 and it has since created a lot of debate in the Legislative Assembly at Queen’s Park. If passed, it would cause the minimum wage to rise to 14$/hour on January 1st, 2018 and, successively, 15$/hour on January 1st 2019.

The question on minimum wages has been hotly debated for a long time, with advocates saying it will reduce poverty and increase the standard of living of the working class, while opposers fearing that it will reduce employment due to the higher cost of labor faced by businesses.

The minimum wage policy is usually aimed towards low income and poor families whose wage is not enough for the current cost of living. That said, this policy might actually hurt their employment. Businesses might fire low skilled employees who are currently earning minimum wage or just above it, but a more common finding in empirical research is that job creation will be lower amongst this type of workers.

Businesses might engage in a so called “labor to labor substitution” by choosing to hire higher skilled workers over minimum wage workers, because the latter now offer less bang for their buck. As an example we could think about a low skilled worker whose wage is now 11.60 (current minimum wage), and a better worker who earns 16$ an hour. Starting from January the 4.40$ hourly salary difference will be reduced to only 2.00$ and this will obviously make the employer more attracted to the better worker whose productivity is valued at 16$. This is probably the reason there is so much disagreement on this type of policy: left wingers usually argue that employment effects are not large and that may be right if we consider the economy as a whole, but the whole point of the policy was to make the poor wealthier.

Another sort of substitution could be the labor to capital substitution, in which businesses pressured by the higher labor costs will move away from low skilled workers, and move towards more machinery. This is especially true for big businesses that have the ability to do so. This comes at a time when increased automation has already done enough damage, especially in the retail industry with grocery shops and pharmacies using the services of cashiers less frequently.

This is also the reason why small businesses may be against this sort of policy and find support with more conservative parties, who are usually against wage hikes.

Empirical evidence suggests that this is true and that a more accurate figure to look at employment effects is to see the amount of hours worked. As an example, an Ontario government report finds that the effects of a minimum wage is more severe when we look at the amount of hours worked, suggesting that some businesses may not decide to lay off their minimum wage workers but rather make them work for less time. This will still lead minimum wage families to have about the same income as before, thus not making them better off.

Elasticity is also very useful to look at when we are evaluating the effects of a policy change: in this case the perfect scenario would be that the elasticity of demand is very low, making demand for labor very insensitive to wage changes and thus allowing for the same amount of low-skilled workers to be employed at the higher new minimum wage.

This ideal scenario is not confirmed by the data, however. Morley Gunderson, CIBC Chair in Youth Employment at the University of Toronto, shows in a report prepared for Ontario’s ministry of Finance that the adverse effects of a minimum wage increase are more extreme than in the US and that a 10% increase in minimum wage would reduce youth employment by 3 to 6% and young adults employment by a similar lower amount.

If we take into account the fact that increasing the minimum wage to 14$ is a 17% increase from the actual level of 11.60, then we can start to see that the effects will be quite large. Using the elasticities reported above, we would have a decrease in teen employment of 5 to 10%. This is staggering, considering that a 2013 report from Statistics Canada, estimated that individuals aged 15 to 24 account for almost 65 percent of all the minimum wage workers in Canada

The question that we ask ourselves is then how are supporters of this hike defending their decision? Many of them usually support their position by saying that the higher wages will benefit the economy as a whole due to increased spending on the workers side, which will lead to positive spillover effect.

US based research papers such as Card and Krueger 1994, in which fast food restaurants in New Jersey, where a minimum wage hike was implemented, were compared to ones in Pennsylvania with a lower minimum wage, find that there is no evidence in lower employment of low-skilled workers. Other research papers that provide small estimates of employment losses also appeal the left wing who supports the rate hike.

The fact to consider is that many of these papers are based on the US economy, which has substantially lower minimum wages compared to the Canadian economy. The US federal minimum wage is 7.25 $ an hour, a little over 9 CAD, if conversion is done with today’s rates.

Currently twenty-nine US states have decided to adopt a minimum wage that is higher than the imposed federal one. As an example New York’s minimum wage is set at 9.70 and will increase yearly by 70 cents, until reaching 12.50 at the end of 2020, at which point it will follow inflation until 15$ an hour.

The most remarking example is California, though. Just like Ontario, California will embrace a journey to the 15$ minimum wage. The big difference in comparing the two regions is that Ontario will reach that target in a little over a year, whereas California has set the target date to be the beginning of 2022. It will increase its wage by 1 dollar every year, starting from 2018 at a level of 11$ an hour.

It seems like US states have a similar trend with Ontario, but the main difference is the speed of the increase. US states seem to give more time for businesses to adapt to the new minimum wage with gradual but small increases, whereas in Ontario the large increases will put more pressure on businesses. Though many economists may not agree on the topic of minimum wage there is a spread consensus  that a large increase in minimum wages causes more damage than an equal increase achieved through small, gradual increases.

Other arguments made by advocates are the reduced wage inequality and the reduction of poverty. Wage inequality is definitely lower since a minimum wage increase requires a transfer from business owners to low skilled workers, but this result may be enhanced by the job loss discussed above. Poverty has instead a weak relationship with poverty since most poor people do not work, and if they do work they work little so that an increase in minimum wage does not increase their income by much.

If eliminating poverty is a social goal that the government wants to pursue then the cost of it should be beared by society rather than individual business owners. Minimum wages do not target poor population in a good way. Young workers who are still in school may be paid minimum wage but their income is subsidized by middle to high income families. This is an issue because while Poverty is usually defined in terms of family income relative to an established threshold to meet the basic needs, minimum wage laws consider the individual regardless of their family support.

A higher minimum wage might also reduce both the demand of low wage jobs that offer training in return. Even though this might make workers better off in the short run by providing them with higher wages, it will lead them to accumulate less human capital and thus be stuck in poverty in the long run.

All together this evidence may suggest that the implementation of this new minimum wage is a political strategy for the upcoming Ontario election for Kathleen Wynne’s liberal party to gain more consensus amongst voters after her approval ratings hit an all-time low in March 2017, and are still lower compared to the rest of Canada’s premiers.

The Progressives Conservatives of Queen’s Park seem concerned by the potential negative effects and would be more satisfied if the minimum wage increase would be more gradual as expressed by the comments of MPP Vic Fedeli on October 2, 2017, who stated that it is important that Ontario reaches the 15$ minimum wage but the speed at which these changes are being implement is just too high.

“Fair Workplaces, Better Jobs” passed the second reading at Queen’s park on October 18, 2017, which will become a law if it passes the third reading that is usually scheduled by the Assembly once a committee has reviewed it as per the usual Ontario Legislative process.

Fernando Crupi is a third year student studying Economics and Statistics at the University of Toronto. 

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