See the original article for the Canadian Student Business Review here
Chief Executive Officer, McGill Students’ Trading Society
With Ontario’s next provincial election to be held within a year, the governing Liberals, led by Kathleen Wynne, are polling in third place, trailing the frontrunner Progressive Conservatives by a margin of 21% (Bozinoff, 2017). In their efforts to gain political traction heading into the election campaign, they have made a very dangerous promise: a $15 per hour minimum wage by 2019. This promise, while presented as an attempt to reduce inequality and lower poverty levels, is little more than a reckless attempt to buy votes while doing little to help those with wages at or near the current minimum wage.
There has been a plethora of evidence recently released that suggests an increased minimum wage may not help low-income employees as voters are being led to believe. Primarily, after a 2014 decision by the city of Seattle to raise their city’s minimum wage from $9.47 per hour in 2014 to $13 per hour in 2016, en-route to a $15 minimum wage, the city commissioned a study by the University of Washington to study the effects of each annual increase. The most recent UW report, released in June 2017, found that increasing the minimum wage to $13 per hour “caused hours worked by low-skilled workers to fall by 9.4%”, with the average wage increase being only 3.1%. The net result was determined to be a 6.6% decrease in earnings for the average low-wage worker (Jardim, et. Al, 2017). This is a clear example of an attempt to reduce income inequality that has backfired, leaving low-wage workers and businesses alike struggling to make ends meet.
If there is any doubt that Ontario’s reaction to a minimum wage increase will be different from that in Seattle, a recent survey of business owners upholds that there is reason to fear the Liberals’ proposed wage hike. A Restaurants Canada survey of restaurants in Toronto indicated that, if a $15 minimum wage comes into effect, 98% will raise menu prices, 97% cut labour hours, and 81% will lay off staff (Restaurants Canada, 2017). Restaurants, one of the largest employment sectors for minimum wage workers, is sending a very straightforward message: the failure of Seattle’s minimum wage hike is poised to repeat itself in Ontario, at the expense of low income workers.
These practical examples are, of course, only upholding what anybody who has taken rudimentary economics already understands; raising the price of a product lowers the demand for that same product. In this case, the product is low-wage labour and the price is being raised by Kathleen Wynne, but the supply and demand curves function the same as with any good. The question then simply becomes, how elastic is this good? The results from Seattle have shown that in the case of workers, the price elasticity sits around -3.0, suggesting once again that any increase in minimum wage will be a net loss for workers. (Jardim, et al, 2017).
On a parallel note, there are also macroeconomic effects to consider. With Stephen Poloz and the Bank of Canada having recently raised interest rates, the effort to begin tightening Canada’s money supply as we trend toward the top of the business cycle has begun. Wynne’s proposed wage increase, one that massively outpaces inflation and is poised to force price increases of other goods (as was discovered by the Restaurants Canada survey) is working against the Bank of Canada by forcing more money to circulate within Ontario’s economy. While it is fiscal, not monetary, policy on which Wynne was elected to focus, it should nonetheless be considered that this move to increase the money supply seems to go against the current policy direction of many of Canada’s key economic actors.
Overall, both theory and practical results are advising against an increase in minimum wage. So, what could be motivating Kathleen Wynne to push one through regardless? The answer is simple: politics. Down by 21% in the polls during an election year, Wynne knows that it is time for her and her party to begin taking political risks. In the case of raising the minimum wage, those who manage to maintain their current hours will be better off because of the wage increase and, therefore more likely to vote for Wynne’s re-election. On the other hand, those who will have their wages or jobs cut and will therefore be in a net loss situation because of the wage hike, will be more likely to vote against Wynne. The important variable in this equation, however, is voter turnout.
Data is not kept specifically on income levels and voter turnout; however, some key indicators suggest that the people Wynne is making happy – those making more money – are significantly more likely to vote in the next election than those workers whom Wynne is hurting. For example, employed workers are 15.7% more likely to vote than those who are unemployed and those working 30-39 hours per week are significantly more likely to vote than those working less than 30 hours per week. In other words, those hurt by Wynne’s reckless minimum wage increase due to lost hours or jobs are statistically less likely to turn out to vote. The conclusion to be drawn from this, quite simply, is that Wynne is likely to have a net increase in votes from those at a low-income level, despite her policy being a net-negative for this same class of people.
The Liberals’ proposed minimum wage increase in Ontario is drastic, political-fodder, and nothing more than a smoke screen. It is poor economic policy disguised as a fool-proof measure to reduce inequality in an election year. To truly help low-income workers, we must look at how we can promote access to higher education, create and maintain high skilled employment opportunities, and give low-income individuals the tools they need to get out of service jobs. A politically-motivated, economically-destructive minimum wage hike is a temporary measure and will do more harm than good.