To understand why Ontario is on the verge of becoming one of the first progressive income-tax regimes in North America, look no further than its new minimum wage.
How the minimum wage is ‘killing jobs’ in Canada, claims Harvard economist Read more
The minimum wage was introduced in 1993 to help address youth unemployment. While this was indeed an important step, it also ran the risk of discouraging people from looking for work because employers would pay them less. This turned out to be a major problem, as little evidence exists to indicate that minimum wages have been effective in reducing youth unemployment.
Fortunately, there are new developments that could overcome this. According to an American study by Goldman Sachs’ Gary Burtless, Canadian and British experience suggests that raising the minimum wage may not result in the negative side effects typically feared, at least with current crop of minimum-wage workers.
In particular, higher minimum wages are associated with faster growth in the number of jobs than would otherwise be the case. This is because most employers tend to try to absorb the new wage costs by hiring more workers for higher pay, as we have seen in the US since the start of the financial crisis. That is the most likely reason that the labour-force participation rates have risen in the US, Canada and the UK since the beginning of the crisis, and that employment rates in the US are actually starting to stabilise.
The new Ontario minimum wage hikes to $14 an hour in 2019, $15 in 2020 and $16.50 in 2021.
The problem with the Goldman Sachs study was that it was a model, not evidence-based. For instance, it may have been using data from 1999, which is pretty old. More recent data are likely to show that more people hired after the wage hike have in fact been hired as permanent workers, rather than as temporary or part-time positions. This is because employers try to fight wage hikes by hiring more temporary workers to absorb the cost of the wage hike, because they can be locked into a contract for a longer period. But once they are locked in, they are more likely to be permanent workers. So the higher wages are most likely for permanent workers.
The second problem with Goldman Sachs’ model is that the effects of raising the minimum wage may vary quite a bit depending on its base cost. And, in fact, the Goldman Sachs study is very flawed as a method for estimating effects of increases in the minimum wage.
The study does not account for one very important cost: the reduction in the number of hours that unemployed workers are willing to work. This reduction in hours is entirely preventable. One might think that because employers will pay more money to new permanent employees than to temporary workers, the new workers will work less. But one need not assume this, because this cost is also normally eliminated as they are hired permanently. In addition, there is an intuitive argument that because the turnover of temporary workers generally involves many fewer hours than those with permanent jobs, the turnover costs might be low if the base of permanent workers is low.
By contrast, the Goldman Sachs study ignored the knock-on effects of raising the minimum wage on some other types of employment – such as the overall availability of jobs for someone without a high school diploma. It was very hard to find other policies that result in greater unemployment or fewer work hours for people without a high school diploma than raising the minimum wage.
But what we really need is a living wage – and higher pay.
A new report by CMAW, the Canadian Payroll Association, and the Unemployed Workers’ Action Centre (UWAC) finds that the gap between Ontario’s minimum wage and the Ontario living wage was nearly $9 an hour in 2016. The report projects this gap to rise to $18 by 2022, at which point 80% of workers would work for less than the Ontario living wage.
As a result, the report estimates that Ontario will have the highest rate of income inequality among the 50 largest provinces, with income inequality that is close to that of some nations within Africa.
In short, the proposed increases to the minimum wage by Ontario will have a negative impact on job growth and actual wage levels. In contrast, a higher minimum wage coupled with the implementation of a living wage for every worker would lead to far fewer young people being unemployed and giving up the search for a job, and to increases in the number of people participating in the labour force.
At a time when we are not experiencing a crisis, raising the minimum wage and implementing a living wage is long overdue. The time is ripe to start instituting them in Ontario and