Minimum Wages Are Job Killers

Posted: January 4, 2018 in Productivity
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The minimum wage in Ontario jumped from $11.60 per hour to $14.00 as of January 1st 2018. Already, there are reports that small businesses will struggle with this jump. This will lead either to increased demands from the workers to generate the productivity increases to compensate, or layoffs and hiring restrictions, as businesses struggle with the increased labour costs without concomittent productivity increases.

Wages are the price of labour. All other factors remaining equal, a mandated minimum wage rise increases the price of unskilled labour, which lowers the demand for it. In other words, less people will be making a bit more money, but it will likely leave many unskilled or under skilled workers in the cold. These are the people normally hired by many small businesses and they can’t afford the pay rise. They will have to lay off workers, hire less workers, and/or do the work themselves.

Additionally, this affects mostly young workers. Statscan’s Labour Force Survey 2015 shows that two thirds of of men earning less than 15K per year (a proxy for minimum wage employment) are in the 15-24 years-old age category. For women, it’s three quarters. I don’t know what explains the disparity. In any case, you can see it here (incidentally reported on an apparently left-wing website): http://www.progressive-economics.ca/…/who-earns…/ (see last table near end of article).

The article notes that young workers deserve “fair” wages too. My question then is, by what standard? If by government fiat, that only raises the price of labour without necessarily generating increased productivity. If by the free market, then the prices reflect the real marginal productivity of the employees that are hired.

The Bank of Canada is predicting that there could be up to 60,000 job losses by 2019 because of increases to minimum wages. TD Bank is predicting 90,000 job losses due to the same cause. These are obviously just forecasts, so we have to take them with a grain of salt. But the reality is that we can’t ignore basic economics by legislating minimum wages. Businesses pay people what they must in order to survive and thrive. But if they can’t generate sufficient profit by doing so, they have three options:

  1. Hire less people;
  2. Improve their productivity (which requires investment in human and intellectual capital development, as well as physical capital); or
  3. Go out of business or go into a different line of business with their existing capital (which may or may not be convertible quickly.

© 2018 Richard Martin. Sharing and reproduction permitted only for non-commercial use.

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