Ontario’s Minimum Wage Gamble

January 11, 2018 Updated: January 11, 2018

To say Ontario’s minimum wage hike is a polarizing issue would be an understatement. Making matters more complicated is the unprecedented size of the increase, which could lead to unpredictable outcomes.

It’s a classic economics problem, and yet economists are divided on what the right policy should be, let alone businesses and workers who actually have skin in the game. So when Ontario jacked up the minimum hourly wage to $14 from $11.60 at the start of 2018—a 20.7 percent increase—it was bound to cause immediate chaos.

The reaction came quickly from some Tim Hortons franchisees, who promptly cut back on worker benefits, sparking a vitriolic response from Ontario Premier Kathleen Wynne. It’s a sign that the adjustment process will not be easy and that debate about economics, business, and even ideologies will rage on.

Those in favor of the increase in the minimum wage have timing on their side, given the vibrant labor market. A total of 422,500 jobs were created in Canada in 2017, a pace beaten just once in the past 30 years (2002), according to BMO. Unemployment in Canada is at its lowest level since 1974, at 5.7 percent after 79,000 jobs were tallied in December.

It’s certainly not going to be good for the economy.
— Philip Cross, Senior Fellow, Macdonald-Laurier Institute

Nevertheless, economic theory says a minimum wage hike will reduce job opportunities for young people. As the cost of labor goes up, the business must use less of it to maintain the same profit margin per unit produced or it must raise its revenues.

In its 2014 publication titled “Economic Principles for Prosperity,” the Fraser Institute points to 14 studies that show a 10 percent increase in the minimum wage leads to a 3 percent to 6 percent drop in employment among people aged 15 to 24. As of 2017, the think tank had amassed 20 studies between 1979 and 2017 that showed hiking the minimum wage resulted in job losses for young people.

“Minimum wage laws thus prevent less skilled workers from getting the entry-level jobs that provide them the experience and new skills they need to move up the economic ladder,” the publication stated.

Philip Cross, senior fellow at the Macdonald-Laurier Institute, lambasted the Ontario Liberals for essentially forcing the private sector to undertake social policy on the government’s behalf.

“It’s certainly not going to be good for the economy,” Cross said in an interview with Onenewsnow.com. “I don’t think any serious economist is predicting this will boost growth in Ontario.”

He predicts firms employing more automation in the long run and leaving Ontario.

The Bank of Canada projects employment would fall by 60,000 jobs, but the net impact on labor income would be positive.

Proponents for the minimum wage hike suggest lower-income households spend almost all their income gains and it tends to remain in the local economy. The question is how many of them keep their jobs, given the outsized increase.

For context, BMO calls the 2.9 percent year-over-year increase in wages from the latest Statistics Canada report “solid.” By 2019, the minimum wage in Ontario will have risen 29 percent to $15 per hour.

Too Much Too Fast

In an editorial for the Atlantic Institute for Market Studies, Sylvain Charlebois, a leading food expert in Canada and dean of the Faculty of Management at Dalhousie University, says a typical restaurant pays its employees anywhere from 25 percent to 35 percent of total revenue. Thus, such an increase in labour costs—29 percent by 2019 in Ontario—is especially difficult for the restaurant industry to bear. And it’s not like this industry can raise prices enough to offset the higher wage bill.

He called the Ontario minimum wage hike “simply irresponsible.”

Trevor Tombe, associate professor of economics at the University of Calgary, said in a tweet that “Ontario’s minimum wage increase is much larger than what we typically see in Canada.” In nominal terms, it’s the largest increase ever and the fourth-largest ever when adjusted for inflation.

However, an analysis by Postmedia showed that minimum wages have hovered at around $10 per hour, adjusted for inflation, since 1970.

Not So Clear

Economics is hardly an exact science, and it is difficult to assess the impact of policy in isolation from macroeconomic trends. The job growth in Alberta would seem to provide a convincing counter-example to the economics textbook; however, the province also benefited from increasing oil prices as it emerged from a two-year recession.

Alberta used to be tied for the lowest minimum wage in the country, but will have the highest as of Oct. 1 when it changes to $15 per hour.

Alberta added 55,000 workers in 2017—its best performance since 2014 when the price of oil was well over US$100 a barrel. In 2017, the price of oil went up 12.5 percent and the province continued a broad-based recovery including a rebound in oil and gas jobs. Employment had picked up from a low base.

While it’s no secret that the minimum wage has not kept up with the cost of living, consumer price inflation hasn’t either, especially post-financial crisis. All the inflation is taking place in asset prices such as the housing market and stocks.

Ontario is the province most dependent on minimum wage workers, so a highly controversial experiment in economics is now underway, given the size of the increase in the minimum wage.

“Much of the evidence we have doesn’t speak to such large increases [in the minimum wage], and there may be unique adjustment costs,” Tombe tweeted.

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Follow Rahul on Twitter: @RV_ETBiz