Ontario Premier Kathleen Wynne has announced plans to hike the province's minimum wage to $15 per hour by 2019. Arguments have been made that such a fast and large increase in wages could kill jobs. On the flip side economist believe that such an increase would stimulate demand that creates jobs. With opposite views coming from business and labour let's look at the employment effect of the minimum wage.
Increase to GDP
As housing cost rise in the biggest cities were most of the population lives; disposable income is constrained leaving less money to make purchases. With respect to higher income households wage gains, less of their disposable income flow into the local economy as their additional consumption often flow into additional savings or imported goods. When lower income households see a rise in income they we virtually spend all of it. This is the bottom-up approach to boost the economy.
The chart below illustrates how big employers with over 500 employees have been steadily relying on minimum wage workers. Many economist talk very negatively about the minimum wage increase but are numb to the fact of ballooning compensation for CEO's and management at the top. Over the past 25 years bargaining power has shifted towards employers and against workers. Which in my opinion is something that needs to be reversed . Respect workers abilities and time. Build the economy from the ground up.
Job Loss
Unfortunately some low margin and small businesses are definitely going to feel the pinch of higher wage costs. Resturants in-particular are going to hire less workers, increase prices, or both and hope it doesn't scare off customers! a policy against tipping in these industries may also be economically healthy ;)
The point is that even where there are job losses, doors of opportunity open up , and more purchasing power is flowing into the local economy spurring demand. Also, not all businesses will find their margins reduced. Some will generate higher than expected profits partially due to paying its workers higher wages (increased productivity/reducing employee turnover).
Now as a young person myself I am concerned about the condition of the young workers market in Ontario. unemployment rate for this demographic group has been steadily falling and is still far below pre-crisis levels. A paper written for the Ontario government in 2007, says a “10 per cent increase in the minimum wage is likely to reduce the employment of teens by three per cent to six percent.” looking back at history we can see unemployment rates go up even as minimum wage declines. There is no 100% concrete relationship between the two. unemployment rates are more linked to the dynamics of macroeconomic supply and demand. Minimum wage policy still does play a role in youth unemployment rates and the effects are felt differently according to geographic region, industry of employment and many other factors.
I have seen videos that say the $15 minimum wage will:
- Increase automation from big corporations
- Fewer employers hiring young people
- Small businesses closing
- Higher prices for everything
While some of these may be true I don't believe these 4 changes have to be bad things.
Many jobs already have been shifted into jobs for machines and automation regardless of the $15 min wage. This is a trend that will continue regardless of minimum wage policy. Indeed, an increase in the minimum wage may increase corporations automation initiatives. however, in the long term these jobs that are becoming automated are already lost.
Now this one is tricky and makes a lot of sense on the business side argument. Whenever prices rise due to market pressure or government regulation, people tend to buy less of it. So if government mandates an increase in the price of less skilled labour and there's no offsetting increase in productivity employers tend to reduce the amount of labour they employ. This is why Canadian research tells us a 10% increase in the minimum wage results in a 3-6% decline in youth employment. The bulk of the empirical evidence supports the standard economic model that minimum wages reduce employment and create unemployment among youths.
Small businesses may have to close. There is no deny it. Yes some small businesses will not be able to survive the new business landscape. Businesses that make it through this landscape will see A LOT more spending for the ones that can hang in there.
Higher prices for everything. Debunked.
Raising the minimum wage does not cause inflation. The argument is that corporations will raise their prices to recapture their profits from the increase in production costs. While this makes sense in theory it is not what happens in reality. When you look at the historical minimum wage increases vs historical inflation rates it is a fact that can be proven.
Conclusion
The fact of the matter is that current minimum wage is way to low to support a family and it's time for some change. Is increasing the minimum wage the best way to help workers from poor households? Rather than using a minimum wage to increase youth's’ current incomes, should policymakers consider policies that improve the labor market opportunities for youth but do not transfer the cost to employers? Ideas such as Welfare payments that kick in if income falls below a certain threshold or increasing the working income tax benefit?
http://www.macleans.ca/economy/economicanalysis/why-a-15-minimum-wage-is-good-for-business/
http://www.cbc.ca/news/opinion/minimum-wage-debate-1.4143772
http://www.cbc.ca/news/canada/toronto/minimum-wage-ontario-15-economic-impact-1.4143033