The inconvenient truths of the $15 minimum wage: Business can’t just ‘make more money'
Here are some of the cold, hard economic findings that may squash some of the more sunny promises of a 'living wage'

Nationalpost.com
Jan. 9, 2018
Tristin Hopper

As governments in Alberta, Ontario and B.C. plan to increase their minimum wage to $15 an hour, it’s fair to say the move has stirred up some emotions. On one side, proponents argue it’s a righteous campaign to bring fairness to exploited dishwashers and cashiers. On the other side, free-enterprise types see it as a wrongheaded crusade to force employers to pay workers more than they’re worth.

But there are differences between what a minimum wage should do, and what it can do.

Whatever your moral arguments, below are some of the cold, hard economic findings that may squash some of the more sunny promises of a “living wage.”

When you make things more expensive, people buy less of it

Many of the Canadian governments now backing a $15 minimum wage are also supporting a carbon tax. The principle of the carbon tax, of course, is that people will buy less fossil fuels if those fuels cost more. There’s no reason to believe the same principle doesn’t apply to workers. Labour, after all, is just another input into the cost of running a business. If a law were passed that suddenly made avocados more expensive, few would be surprised if restaurants started going easier on the guacamole. When diesel prices go up, it’s expected that trucking companies will start trying to increase their fleet’s fuel efficiency. Similarly, if a worker is more expensive, it’s rational to expect that employers will be more hesitant to hire them.
Avocados don’t have families and rent to make, which is why avocado economics aren’t quite as charged. Mark Ralston/AFP/Getty Images

It’s reasonable to expect job losses

It’s not an ironclad rule that higher minimum wages necessarily lead to layoffs. A vast array of U.S. studies, for instance, have found little to no “disemployment” after modest increases to the minimum wage. Sometimes, the employment rate has even gone up. However, Canadian studies are more worrisome. In Ontario, the Fiscal Accountability Office has forecast that the province will suffer job losses of 50,000 as a result of the minimum wage. TD Bank pegged Ontario’s damage at 90,000 jobs by 2020. The Bank of Canada has estimated that by 2019, Canada will have about 60,000 fewer jobs as a result of provincial minimum wage hikes. Ever since the 1990s, in fact, Canadian studies on minimum wage hikes have repeatedly failed to match the promising results found in U.S. studies, and have usually found evidence of job losses. In short, a $15 minimum wage is unlikely to come without costs. The likely forecast is that some Canadians will get a pay raise, others will get a layoff notice and still others will simply never get hired. A common misconception from the anti-$15 crowd is that most minimum wage workers are just suburban teens looking to make some extra pin money. In reality, analysis by the left-leaning Canadian Centre for Policy Alternatives estimates that in Ontario only 34 per cent of minimum wage workers are of high school age. However, as one of the least skilled demographics in the workforce, teens are well-placed to be hit particularly hard by job losses. And not all those teens are living comfortably in the suburbs. “A higher minimum wage may paradoxically result in more poverty as teen unemployment results in a drop in household income among low-income families,” concluded one 2009 study of employment trends by the University of Waterloo.

Businesses generally can’t just “make more money”

The ideal outcome to a minimum wage hike would be if business owners simply became more prosperous and shared the bounty with their workers. But if there’s one constant among minimum wage studies, it’s that having higher-paid employees generally doesn’t prompt more customers to walk in. As a result, employers have to absorb higher labour costs by toying with the existing ledger. A 2013 report by the Centre for Economic Policy and Research delved into the ways this has happened over the years. Higher-paid employees might have their wages and benefits cut to compensate (a phenomenon known as “wage compression”). Businesses may experience less turnover; fewer workers are hired, but the now-better-paid employees work harder and are less likely to quit. “Picture a bathtub: pouring less water in, but draining less out, need not result in any change in the quantity of water,” University of Calgary economist Trevor Tombe told the National Post. Or, businesses can just raise prices. A minimum wage hike is a golden opportunity to raise prices, since employers know that their competitors are being hit with the exact same increases to their payroll costs. Either way, somebody ends up paying for a higher minimum wage, and there’s no guarantee that cost will be paid out of something uncontroversial such as corporate profits.