Governments gamble on a minimum wage hike

On January 1, Ontario raised the  general minimum wage in its jurisdiction to from $11.60 per hour to $14.00. British Columbians are promised a similar jump in the near future, though the timing is subject to the work of a government-appointed commission.

Members of the Tim Hortons restaurants’ founding family reacted to the Ontario increase by taking petty revenge on their own workers, stripping them of non-wage benefits at the locations they still own directly. This triggered a brawl within the Tim Hortons organization, with the corporate head office urging franchise owners to handle the issue more discreetly.

This blog site supports the implementation of a substantially higher minimum wage in Canada because it will benefit a large number of people, acknowledging that the increase will put pressure on small businesses that are already drifting to the margins for other reasons.

I’ve been following the news media since the mid-1960s, when the minimum wage in my home province was something like $1.25 per hour. At every minimum wage hike, small business groups have issued dire warnings about job losses and business failure. The facts, as I understand them, are roughly as follows.

First, minimum wage increases over the past 40 years have been entirely eaten up by inflation. On June 15, 2017, Global News quoted Statistics Canada on this point: “While Canada has undergone important economic, social and technological changes since the 1970s, the minimum wage and the average hourly wage are essentially unchanged.”

Second, through the long era when the real minimum wage was unchanged, a huge number of small businesses closed their doors nonetheless. A 2010 Industry Canada study stated that a business failure rate of 50 per cent in the first five years of operation is normal. “Young organizations face many vulnerabilities and liabilities. They may lack sufficient financing, business networks and skilled employees in their early days. They may still be having problems ensuring consistent production quality. It takes time to develop a reputation in the market and a stable set of customers and suppliers.” 

Other commentators are less charitable. Googling at random, I find blogger Patricia Schaefer (2017) suggesting that “Going into business for the wrong reasons,” and “Poor management” are the top two of seven common reasons for business failure. The minimum wage does not come up.

Of course, a sudden 20 per cent increase in the minimum wage is well above the norm. It is intended to be a game-changer. It represents an effort by Ontario, and presumably British Columbia, to deliver a real wage increase to folks who have been struggling, especially with runaway housing costs.

A new study published by the Bank of Canada estimates that 8 per cent of the national labour force earns the minimum wage, or about 1.5 million individuals. About 40 per cent of the minimum wage group, according to a Statscan report from 2014, are over the age of 25. A wage boost  obviously improves the ability of minimum wage earners to find decent housing and look after their kids, if not save for retirement. The Bank of Canada study suggests that a wider group of low income earners, more than a million people nation-wide, would see their low wages bumped up as a result of the minimum wage hike.

The downside to a 20 per cent minimum wage increase is that some businesses will cut their expansion plans, and others will blame the change for their decision to fold. Business failures may occur, for example, in rural villages and hamlets where the customer base is small, and the convenience store or cafe has operated at the margin for some time; or in Metro Vancouver locations where retail-store rents have tripled in the past few years. The Bank of Canada study estimates that forecast minimum wage hikes will raise total labour income, but will reduce national net job creation during 2018 by somewhere between 30,000 and 160,000 full-time equivalent jobs. By comparison, the Canadian economy created an estimated 440,000 jobs in 2017.

The Ontario and B.C. governments are gambling here. The will both face well-organized right-of-centre parties in their next election campaigns. For Ontario, that event arrives in spring 2018. Small business people vote; low-income people often don’t vote. The two governments can only hope that the economic and social benefits from the increased minimum wage will offset the hard-luck stories from affected businesses; or that voters want to hear about something else.

 

3 responses

  1. “First, minimum wage increases over the past 40 years have been entirely eaten up by inflation. ”

    Exactly, increasing wages produces inflationary forces.

    • According to standard economic theory, increased productivity in the economy will create space for wages to rise without inflationary effects. If the minimum wage is tracking inflation, standard theory would suggest that either there has been no increase in productivity — a bogus option, given the hundreds of thousands of jobs have been replaced by digital functions and other efficiencies, at Tim Hortons and other places — or else the gains from productivity have flowed entirely to the owners and operators of business, which appears to be nearer the truth, and a bad thing in my opinion. In the case of Tim Hortons, it is reliably reported that the profitability in the system has been swallowed up by the new Brazilian corporate owners over a very short period, leaving the franchisees in an evil mood.

  2. You seem to be mostly overlooking the fact that the increased wages will be spent by the recipients. So business will have to pay more, but they will receive more as well. There will be winners and losers, but overall it should mostly net, probably with an overall positive impact since the return to society from increased income to minimum wage earners is probably higher than the return on income to business owners.

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