An end to minimum-wage politics

Many politicians and interest groups advocate a rapid increase in the minimum wage in the name of social justice. Yet this ignores the results of past experiments. Ontario’s new minister of labour, Laurie Scott, pushed back by cancelling the increase to $15 planned for January 2019 — her government’s legislation to make the cancellation official is expected to have its third reading at Queen’s Park Tuesday — stating that the minimum wage should be determined “by economics, not politics.” This is a reasonable compromise, which will avoid further harming workers at the bottom of the ladder, and more specifically the young.

The minimum wage previously jumped from $11.60 to $14 in Ontario at the start of 2018. Adverse effects are already being felt, despite the strength of the economy. This can be explained by the substantial increase in the ratio of the minimum wage to the average wage. Quebec’s experience during the 1970s showed, among other things, that the number of jobs fell if this ratio was too high.

In Ontario, the January 2018 increase bumped the ratio of the minimum wage from 43 per cent of the average hourly wage to 51 per cent, far above the 45-per-cent threshold that limits the effects on employment. It is therefore not surprising to find that the employment rate among workers between 15 and 24 years of age, which had been trending upward for quite some time, fell when the minimum-wage law was adopted in November 2017. Thus, over 56,000 workers aged 15 to 24 lost their jobs between the law’s adoption and October 2018.

Furthermore, between the law’s adoption and September 2018, there has been a 5.6-per-cent increase in the prices of meals in restaurants, a sector in which nearly 70 per cent of workers earned less than $15 an hour before adoption. This price increase is over three times greater than that observed in the other provinces over the same period.

Finally, we can also expect the impacts of the minimum wage hike to have been greater in rural regions, where the average wage is generally lower. Workers who live there are thus more at risk of losing their jobs, or of having their hours or their benefits cut.

While it may seem paradoxical, practically all studies show that a substantial increase in the minimum wage does not reduce poverty; it mostly affects people who are not in low-income situations, and it even contributes to an increase in poverty due to the jobs that it destroys.

A report from the Financial Accountability Office of Ontario on the effect of raising the minimum wage to $15 also concludes that this measure is not an effective way to reduce poverty, estimating moreover that it would entail a net loss of at least 50,000 jobs in the province. Indeed, the results observed so far are very much in this ballpark.

Ultimately, it is mainly young workers and immigrants of all ages who suffer the adverse effects associated with a too-rapid increase in the minimum wage. The scientific literature is quite unanimous in this regard, and the debates that persist deal more with the size of these negative consequences as a function of the level of productivity, the structure of the labour market, and the size of the increase.

Cancelling the planned January 2019 increase was the right decision, and it will undoubtedly limit the damage caused by the preceding hike. Basing future increases on the evolution of the cost of living will also depoliticize them and make them more predictable for companies. No one doubts the good intentions of those who continue to call for rapidly increasing the minimum wage in all circumstances, but that does not make it an effective measure for reducing poverty.

There are other ways of doing so, including raising the basic income tax exemption, reducing the barriers that restrict access to the labour market, or even increasing the tax benefit for low-income workers who need to support themselves. These are the kinds of things we should be looking at if the purpose is to help poorer workers.

Alexandre Moreau is a Public Policy Analyst at the Montreal Economic Institute and the author of “The Minimum Wage: Ontario Was Right to Cancel the Hike to $15.” The views reflected in this op-ed are his own.

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