Why politics drives a minimum wage wedge

The minimum wage is as much about theology as ideology, and the decision is usually more about politics than economics.

Thestar.com
May 31, 2017
By Martin Regg Cohn

Raising the minimum wage always drives a maximum wedge.

Unions wonder why it took so long. Business worries about a long recovery time.

This week, Ontario announced it is raising the ante - boosting the hourly rate from $11.40 today to $15 by 2019.

On cue, there were predictions of boom and bust that divided along ideological lines. But the reality is rarely an economic meltdown or an economic miracle - not even a panacea for poverty.

Life goes on, the economy lives on, the debate goes on.

For business, there is no good time to increase wages, because it adds to their costs and raises their rhetoric - every time. Activists counter that it’s long past time to lift people from the ranks of the working poor - despite data showing it’s an inefficient anti-poverty tool.

In truth there’s no proof. The minimum wage is as much about theology as ideology, and the decision is usually more about politics than economics.

An election is looming. The economy is booming.
And politics is about nothing if not timing. There is no better time for Premier Kathleen Wynne to make her move and mark her legacy.

Ontario’s unemployment rate has plummeted to a remarkable 5.8 per cent - the lowest in 16 years. Economic growth has been leading the country, driven by increased exports. All that despite Premier Kathleen Wynne bumping up the minimum wage to $11 back in 2014.

Business critics cite the steady exodus of manufacturing jobs to lower-wage jurisdictions around the world. But that argument only undermines their position.

Those coveted jobs are long gone because they were always mobile - they didn’t require proximity to markets or availability of skilled workers. But the low-wage jobs that remain - outside of the high-wage high-tech or value-added manufacturing sector - are typically in the service sector, and less likely to be portable or dispensable.

Your local Tim Horton’s can’t just pack up and relocate to Alabama. Hotels can’t leave town if they want to serve visitors.

Business passes on those higher minimum wage costs to customers, which raises our cost of living. But business also benefits from more customers earning a living wage, which is the magic of economic activity.

The challenge is reaching an economic equilibrium - a minimum wage that balances these two seemingly competing effects. Which is why politicians are so often undecided about doing the right thing.

The last time Wynne looked at wage rates, in 2014, she inherited an economy in disequilibrium. Previous Progressive Conservative governments had frozen the legal minimum for nine years. Former Liberal premier Dalton McGuinty bumped it up a bit under pressure, then let it languish for another four years.

Back then, Wynne opted for a safe compromise - a catch-up increase in the hourly rate from $10.25 to $11 that recouped the lost years of inflation, with a new technical mechanism to keep up with future increases in the cost of living. She hailed it as a technocratic solution that would “take the politics out” of the equation and any calculations. In a way, she was insulating the minimum wage from any future freeze if the Tories took power.

But that was then, this is now, and three years later Wynne’s Liberals are still in power. The world has changed, and the government is putting the politics back in the minimum wage.

Ontario, which once led the country, now lags Alberta, whose NDP government has embraced a $15 wage. With the NDP poised to take power in B.C., another province will fall into line. Ontario’s NDP, which was conspicuously silent about the minimum wage in 2014 - when party leader Andrea Horwath was eagerly wooing small business supporters - belatedly backed a $14 minimum, and now supports $15.

Patrick Brown, whose opposition Progressive Conservatives are poised to win power next year (according to most polls), won’t say exactly where he stands on the issue - he is wary of the wedge - except that it is going too far too fast. He warns that it will cost the province jobs, and that Ontario has yet to properly assess the impact.

But in 2014, a government advisory panel found conflicting evidence: U.S. research was contradictory, while the Canadian experience suggested minimal impacts. Interestingly, the study also found the majority of minimum wage earners were young people living as dependants in the family home, not in poverty.

In her campaign-style announcement this week, Wynne noted that only 10 per cent of workers earn the minimum wage. But 30 per cent earn less than $15 an hour, and many more will benefit from the fact that a higher minimum raises the floor for all wage earners.

Which is a lot of workers - and voters - who stand to gain from her decision. A decision that is as much about politics as economics - with the outcome unpredictable on both fronts.

Sometimes, though, good politics is good government. As is good timing.