What Ontario’s minimum wage increase means

Forming good public policy is an exceedingly difficult task. The current efforts to raise the minimum wage in various provinces offer illustrations.

The clear objective is to provide income support to those in the labour force who, even if they work 40 hours per week, will not earn sufficient income to live above the poverty line.

The reasons some Canadians earn only low wages vary. Some workers may lack skills or their local labour market may offer only limited employment opportunities so potential employers are able to offer low wages and still recruit workers. Or the national or local economy may be suffering a prolonged period of recession

It is believed by many that setting a higher minimum wage will lift low-income earners out of poverty. The other less-often-mentioned objective of a minimum wage policy is to avoid any direct government expenditure on the effort to lift people out of poverty such as through a guaranteed annual income program.

Policy-makers are well aware of the difficulties of managing such a program. You need to make it subject to means testing so that those who obviously do not need assistance will not be included. And how can you assure that this administrative barrier works efficiently and cost-effectively, especially given a level of churn in both the level participation in the labour force and high levels of frequent layoffs in the low-wage sector?

Politicians long ago discovered that legislating a minimum wage is the more attractive policy for dealing with this question. Not only does it force the major adjustment onto the non-government sectors but it also looks attractive to voters. Raising the minimum wage is a clear indication that the government is addressing the problem of low income.

The major problem with using this approach is determining the appropriate amount of any increase in the minimum wage. Consider the case of the government of Ontario which recently increased the minimum wage by 22 per cent and promised a further increase one year hence for a total of 32 per cent over 18 months. The Liberal government in Ontario is lagging far behind in polls and, with an election due this year, the premier thought a hefty increase in the minimum wage would be a political winner.

But, while adjusting to such an increase in the cost of labour is relatively simple for government (they can raise taxes or borrow), the same cannot be said for many employers in the private sector, particularly small business and not-for-profits. They do not necessarily have the ability to shift all of the increased costs to their clients in the form of higher prices.

So, some employers may decide to cut benefits or reduce hours, thereby pushing some of the adjustment onto their employees and partially defeating the original purpose of raising the minimum wage. When this happened (predictably) in Ontario, the employers who announced such a policy were denounced as “bullies” by the government.

But what these employers were doing was illustrating their predicaments. While they might consider raising the prices on the products and services they sell, they may find they lose business to competitors who decide to accept a lower rate of return on their capital by not raising their prices. Or all businesses in a sub-sector may suffer a decline in sales because the demand for their products is extremely price-sensitive.

The Ontario increases, transparently motivated by political considerations, are too large over too short a period of time to allow for orderly adjustment in the private sector. Many Ontario voters may judge the government’s motivation harshly and find the implementation ham-fisted.

What governments should be doing is reducing the inflow of unskilled workers by improving the effectiveness of the education system, promoting full employment and facilitating labour mobility so that the unemployed can afford to move where the jobs are. But these practical measures lack the glamour of increasing the minimum wage.