The Unintended Consequences of an Excessive Increase in the Minimum Wage

Montreal, January 18, 2022 – Following Minister Jean Boulet’s announcement on Friday that the minimum wage in Quebec will go from $13.50 to $14.25 an hour, certain community groups and unions suggested that this was a missed opportunity to raise it to $18 an hour.

In a new Montreal Economic Institute publication, economist Maria Lily Shaw and public policy analyst Gabriel Giguère conclude that even though a hike to $18 an hour may seem beneficial for low-income workers, this steep 33% increase would have negative consequences on the financial health of a range of companies in the retail, food services, and accommodation sectors. They even maintain that many workers in these sectors could lose their jobs.

Job losses and consumer price increases

“No less than nine in ten SMEs would be directly affected by this increase. As a result, some portion of the over 200,000 minimum wage earners working for these companies would run the risk of losing their job,” explains Gabriel Giguère, public policy analyst at the MEI.

The retail, food services, and accommodation sectors together account for 68% of workers earning minimum wage, or some 182,000 employees. Companies in these sectors generate very modest surpluses after having paid their taxes and subtracted their administrative and operating expenses such as material, labour, and manufacturing costs.

“For example, the profit margins for gas stations and restaurants are less than 3%, so for every $100 they make in sales, they only have $3 left over once they’ve paid their employees and covered their other expenses. A sudden and drastic hike in the minimum wage would jeopardize their financial health, and they would have to reduce expenses by laying off employees, cutting hours, or passing the bill on to consumers,” adds Maria Lily Shaw, economist at the MEI.

Minimum wage earners in Quebec: A temporary situation

According to a widespread belief, the typical minimum wage worker in Quebec is a single mother. This stereotype, however, is far from reflecting the reality of the matter. The typical minimum wage earner in Quebec is rather between 15 and 24 years of age and has a part-time job in retail, food services, or accommodation. For a student working part-time, earning minimum wage does not have the same consequences as for a single parent. The tax system already factors in the needs and responsibilities of a person with dependent children, a fact that is too often ignored in conversations on hiking the minimum wage.

“Let’s take the case of a single parent. In 2021, their hourly wage of $13.50 an hour works out to an annual gross income of $24,570. Adding in the amounts received in benefits, and subtracting various taxes and contributions, their annual net income amounts to $34,672, which is the equivalent of $19.05 an hour. This amount is actually higher than what is being demanded by unions,” comments Maria Lily Shaw.

Given the typical profile of those earning minimum wage, it is clearly a temporary situation in the majority of cases, and other solutions should be considered.

Prioritizing education and training instead of the “easy fix”

Even though increasing the minimum wage is a measure with very laudable motives, the MEI researchers maintain that there are other, more effective and less economically harmful ways to come to the aid of those in need. Workers deserve better than temporary and ill-advised aid that will also hurt entrepreneurs who are already struggling to keep their heads above water.

“We mustn’t fall into the trap of choosing the public policy that seems like an easy fix. Organizations, unions, and politicians need to understand that there are other ways to directly assist low-income workers, like education and training, as well as measures aimed specifically at the less fortunate,” concludes Gabriel Giguère.

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The Montreal Economic Institute is an independent public policy think tank. Through its publications, media appearances, and advisory services to policy-makers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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