Provide wage help, not compensation control
In order to keep businesses and workers afloat during the pandemic, the federal government is paying out billions of dollars every week in wage subsidies. It needs to resist the temptation to use the subsidies as an excuse to dictate how the businesses ought to be run. Government meddling in business decisions is a sure way to cut the rate of business survival and slow the eventual economic recovery.
It was disappointing, then, earlier this month to see Pierre Poilievre, the Conservative finance critic, citing the socialist Canadian Centre for Policy Alternatives in calling for a ban on companies paying executive bonuses while receiving the wage subsidy. Poilievre’s logic: if a company can’t afford workers’ wages, then it can’t afford executive bonuses. If you think about that statement for 10 seconds, it makes sense. But consider it for another 30 and you’ll realize it’s a complete non sequitur. A company’s financial resources are not fixed. Employee compensation is not determined arbitrarily or independently of productive output.
Banning companies receiving the wage subsidy from paying executive bonuses is like banning them from purchasing better computer software, buying more advertising, or paying to clean the windows. Like executive bonuses, that is spending companies undertake because they expect it to ultimately help their bottom line. If a company decides offering bonuses to motivate executives to drum up higher sales is more effective than a new advertising campaign, why should the government ban the bonuses but allow the advertising spending? In the current environment, any company that did raise bonuses would understand it was going to take political heat — to say the least. If it went ahead anyway, that only means the business case for them must be bulletproof.
Will workers at companies struggling to get by really be helped if the federal government dictates decisions as to how the company is run and its resources allocated? Surely not. Quite the contrary, one of the best ways government can help businesses and workers during the crisis is to reduce its control of employee compensation. In particular, provincial governments ought to suspend their minimum wage laws. They were never a good idea to begin with but now, with businesses struggling to survive and huge numbers of workers being laid off, they are even more harmful.
The effect of, for example, Ontario’s minimum wage of $ 14 per hour is to make it impossible for an employer to provide a job to a worker whose maximum productive output is less than $ 14 hourly unless that employer is willing to lose money. Unfortunately, one of the effects of the pandemic, as economics professor and Bloomberg columnist Tyler Cowen recently noted on his blog, is to make the “marginal product of labour” much lower. Less consumer demand for many goods and services might mean a worker’s output of $ 16 per hour three months ago is only $ 10 per hour today. Such a worker will likely find it hard to stay employed if the government makes it illegal for him to be paid less than $ 14 per hour — an amount 40 per cent higher than his labour is currently worth.
Meanwhile, as Cowen pointed out, the main argument in favour of the minimum wage — that restaurants and other businesses earn “excessive” profits that ought to be redistributed to low- wage workers — is severely weakened now. Not that it was a good argument before the pandemic: competition among businesses generally prevents them from overcharging customers or underpaying workers in the long run. But now, many businesses aren’t earning profits at all. There is nothing to redistribute to workers. Attempts at redistribution via high minimum wages condemn more businesses to closure and their workers to unemployment.
Many restaurants that are shutting their doors right now might be able to stay open as delivery and takeout places if they were able to pay lower wages of, say, $ 10 per hour. Given that over one million workers lost their jobs in March alone, there are probably lots of people who would be happy to work for $ 10 per hour: it’s much higher than $0. All that prevents restaurants and other businesses from getting together with workers for mutual economic gain of this sort is the minimum wage law.
Labour market price controls, whether for the lowest paid workers or for top executives, are never a good idea. Allowing businesses and workers to pursue economic gain unencumbered by government is the best way to help them stay afloat during the pandemic and ensure a strong eventual recovery from the current crisis.
In particular, provincial governments ought to suspend their minimum wage laws.