Minimum wage myopia
The sharp hike in Ontario’s minimum wage to $ 14 an hour on Jan. 1 is only the most recent of a wide range of actions and gestures signalling the Wynne government’s indifference or outright hostility to the business community. The government for years had increasingly regulated the relationship between businesses and their customers; now it is increasingly controlling the relationship between business and its workers. Both sets of actions are predicated on the assumption that businesses fundamentally act as predators towards customers and workers. If that really were true, capitalism would have ceased to exist long ago.
In the short term, firms will minimize the impact on total labour costs by adjusting non- wage benefits and hours of work. In the longer run, firms will adjust employment and capital by cutting back on hiring, by automating jobs, and by moving to nearby jurisdictions, especially exportbased industries which face U. S. competitors with much lower minimum wages and i ncome taxes along with cheaper hydro rates. In both the short term and l ong term, large firms have an advantage over small firms in being able to juggle their labour force and capital investment to adapt, although even Loblaw, the grocery behemoth, and auto parts giant Magna have complained about the high cost of the minimum wage.
George Stigler, who led t he defence of classical microeconomics even as his University of Chicago coll eague Milton Friedman spearheaded the post- war attack on Keynesian macroeconomics, wrote: “To an economist no truth is more firmly held than the one that as something gets more expensive, people buy less of it. Demand curves have a negative slope.” This applies to labour as much as it does bread or cars; raise the price by 20 per cent overnight, and demand is surely going to fall.
This is why it is hard to understand the social justice warriors in the Wynne government and the union movement who argue that hiking the minimum wage will help low-income people. While those keeping their jobs will benefit, the most vulnerable will see cuts to non- wage benefits, shorter hours of work or the loss of jobs altogether. Non- partisan estimates from both the Bank of Canada and Ontario’s own Financial Accountability Office predict job losses of about 60,000 due to higher minimum wages, possibly much more. Since people in low- paying jobs have the fewest skills, especially youths, losing a j ob further marginalizes their place in the labour force and increases their dependency on government handouts. Perhaps it is no coincidence that Ontario also started its free pharmaceutical program for people under 25 years on Jan. 1.
Then again, why would anyone expect the Wynne government to be on the side of ordinary people? This is the same government that cruelly raised hydro rates last year to pacify militant environmental groups and was tone deaf to the subsequent outcry — at least until Prime Minister Justin Trudeau was famously confronted at a public town hall by an Ontario mom in tears over her hydro bills.
It was a mistake from the start to ask business firms to implement a social policy on behalf of government. If the Wynne government wanted to tackle poverty directly then some combination of wage subsidies, skills upgrading, tax credits and tax cuts were options. However, after years of fiscal profligacy ( i ncluding borrowing $ 10 billion this year even as it pretends to have balanced the books), the government is broke. Therefore, it tried to mandate that business spend its own money pursuing the government’s goals. Now it’s complaining that firms might do so in a way that it finds distasteful, like rolling back hours and benefits. Governments fail to anticipate the response of firms because they have no understanding of the importance of cost cutting in a competitive marketplace. Contracting out social policy to businesses is a recipe for harming firms while failing to achieve these policy goals, leaving everyone unhappy.
We all want people to become better off through higher economic growth. However, fantasizing that prosperity can simply be legislated is wrong- headed and may even backfire. Sustainable growth f or low- income earners comes f rom a strong economy, as evidenced by the tight U. S. labour market where 625,000 job vacancies in retailing alone have induced firms like Target and WalMart to announce a policy of raising their minimum wage t o US$ 15 an hour ( more than twice the mandated federal minimum). This is how to create betterpaying jobs without setting off a chain reaction of cuts to non- wage benefits, fewer hours of work and ultimately lost jobs that will cause more friction for Ontario’s businesses in dealing with their government, customers and workers.