February 10, 2018
While it has barely been a month since the Ontario minimum wage was raised from $11.60 per hour to $14.00 at the start of 2018, a multitude of questions and concerns remain. Each side of the partisan divide seems to be holding its breath, waiting for any piece of data on employment or monthly income that it can use as ammunition to bolster or denounce the new legislation. A recent study (June 2017) from the National Bureau of Economic Research (NBER) on the 2016 minimum wage increase in Seattle has provided skeptics with a piece of concrete research suggesting the wage increases will have a resoundingly negative impact on the lowest wage earners; the same people the Liberal’s legislation is aiming to protect. Indeed, a more recent December 2017 report by the Bank of Canada suggests that as many as 60 000 jobs could be lost as a consequence of the change in legislation. With more minimum wage increases on the horizon (in British Columbia and Alberta) these concerns are more relevant than ever. For their part, news outlets like the Toronto Star, The Globe and Mail, and Global News have been publishing stories reflecting these fears: “Minimum wage increases could lead to 60,000 fewer jobs by 2019: Bank of Canada”, “Small business owners brace for impact as Ontario minimum-wage hike takes effect”, “Lost jobs, cut hours, no paid breaks. Do minimum wage hikes hurt workers?”. These headlines underscore the litany of fears about a change in the minimum wage, particularly for small business owners who are liable to be affected the most by these legislative changes. Conversely, for workers these fears are no less pertinent: the 2016 census recorded that 14.4% of Ontario residents are classified as low-income. For these people a potential reduction in income, as is suggested by the Washington state study, could be devastating financially; clearly the stakes are high.
However, before the rioting starts over the liberal’s war on small business and low-income workers, a few things should be considered. While the NBER study clearly indicates that for workers in Washington earning close to the minimum wage, average incomes fell by around 125 USD per month, it cannot speak to the long-term effects of a minimum wage increase,which are still largely in the realm of economic theory. While wage increase skeptics like to tout the “basic economic concept” of inflation as negating any increases in the wage (the logic being that any increases in spending power from a higher wage will be negated by price increases) this is perhaps too basic of a concept to apply to the real world; this point is also likely moot due to the fact that the minimum wage will now be tied to inflation. Furthermore, as 53 Canadian economists pointed out in an open letter published through The Progressive Economics Forum, productivity increases by low wage workers may offset the increased wage burden and, thus, businesses may be able to avoid increasing their prices substantially. Similarly, because low wage earners typically spend much more of their income on goods and services than higher income workers, any increase in spending power should hypothetically be infused back into the economy quickly and fully. All of these theories should be interpreted with a grain of salt. Economics is a science notorious for its unreliability in analyzing real-world interactions, however the above should cast some doubt on the long-term impacts of minimum wage increases.
Additionally, little thought has been given to the effect that a reduction in hours worked has on overall well-being for low-income workers. While many news outlets quote the reduction in hours worked in Washington state as a great evil it could also be interpreted as a newfound freedom. For those working 40 hours a week at or near the minimum wage, having additional free time could provide them the opportunity to seek out more education or spend time with family and friends. Of course, the above is purely speculative; it is equally possible that the greater freedom has little effect on development and it can’t be argued that lower monthly incomes are somehow a good thing for minimum wage workers.
This article is by no means intended to support or decry the recent legislative changes to the minimum wage across Canada, merely to point out that the underlying economic theory is undecided on the long-term impact and that judgement should be held out until more research is available. That being said, there are still many valid criticisms of the particular way in which the minimum wage increases were affected in Ontario. Increasing the wage so suddenly is bound to hurt small businesses with thin margins and it is worrying that by the time concrete data is available on the impacts for Ontario, increases will already have been implemented in two of Canada’s most populous provinces. Either way, it cannot be denied that the short run impacts of a minimum wage increase, as suggested by the NBER study, validate many of the fears held by Canadians. Hopefully the long-term picture ends up looking brighter.
-Washington Study: http://papers.nber.org/tmp/41936-w23532.pdf
-Open letter from Canadian economists: http://www.progressive-economics.ca/2017/06/29/economists-support-15-minimum-wage-in-ontario/
-Bank of Canada report: https://www.bankofcanada.ca/wp-content/uploads/2017/12/san2017-26.pdf