Ontario Premier, Kathleen Wynne announced that the province intends to increase the minimum wage to $15/hour by 2019 (link). This represents a 31.5 percent increase from its current level of $11.40/hour. This would represent the largest increase in the minimum wage in Ontario’s history. A strong indication of the real value of the minimum wage is to compare it to the to the average wage. In 2017, the minimum wage represented 47 percent of the average national wage. Assuming that average wages increase at 2.7 percent, as they did in 2016, the minimum wage would increase to 57 percent of average wages by 2019. This increase comes with a package of labour reforms that enhance both individual and collective labour rights (link). Ontario is also at the forefront of incomes policies. For example, the universal basic income (UBI). A pilot program is in the planning and soon to begin (link).
The Ontario Liberals are proposing a very progressive set of labour policies. I am supportive of these policies. I support policies that curb precarious contracts, more notice about schedules, and making it easier to form a union. I also am a long-time advocate of the UBI. If we are to be even handed, all these represent increased costs for firms. The increase in the minimum wage has generated the ire of the business community. This is especially the case for small businesses, as many tend to employ low wage labour. The argument is that these businesses will find it too expensive to hire employees. Some employers claim that their firms will have to close down. This may be the case for a few firms, but anecdotes do not make for a convincing argument. Most firms will not shut down, but this does not mean there will no negative effects.
The economics 101 argument against minimum wage is that increasing the price of labour will reduce its demand. A background assumption is that labour is like most other commodities. That is, labour is easily substituted. In other words, firms can reduce workers and replace them with robots. Force existing workers to work even harder. Or hire higher productivity workers who demand wages equal to their productivity. So, an x increase in the wage will lead to a y decrease in low wage employment. But, labour is not like other commodities. It is not easily substituted. Especially if there is a labour shortage. Either there aren’t enough workers, or there aren’t many workers willing to work at that wage. If this is the case, then firms are more likely to pass on the prices onto consumers. Or, if the firm is as big as Wal-Mart, they may pass the price onto their suppliers. It’s also possible to imagine firms maintaining employment and stable prices. How? Fudging around with the hours worked by workers. A study from Seattle suggests this is occurring after a set of minimum wage increases.
The study (link) shows that an increase of the minimum wage to $13 hour made low-skilled workers worse off. As the authors state, “we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016“ (2). In other words, employers compensated for higher wages by to decreasing hours. The authors admit that they only have data for firms that only have one establishment. This sample is representative of small businesses. They lack data for larger firms. Yet, they note “multi-site firms who we surveyed were more likely to self-report cuts in employment than smaller firms” (37). Thus, if comparable data for larger firms may show employment losses to be large. This may be due to larger firms having better access to technology. I’ll get to larger firms later in the post.
A critique is that this study is not relevant for a large polity like Ontario. True, the market dynamics could be different in Ontario in some unexpected ways. But, I show that the effects in Ontario may be worse. They note that “some employers may have shifted jobs out of Seattle, but kept them within the metropolitan area, in which case the job losses in Seattle overstate losses in the local labor market” (38). This is very unlikely in the case of Ontario. Exit to other jurisdictions for low wage workers is next to impossible. Since neighboring provinces are unlikely to raise minimum wages to Ontario levels. It would be important to see how the labour market in Ottawa reacts compared to the rest of the province. Even there, the ability of low wage workers to work in Quebec is limited for linguistic reasons. Ontario would be an ideal case to test the effects of increasing the minimum wage in a national economy.
Another impact of the increase in the minimum wage is to further concentrate capital. As Ezra Klein notes (link), “And so if you begin to increase the minimum wage, you might actually really get Walmart workers a raise, but you might also hurt the corner store, and if you do that a bunch of different times, what you’re doing is systematically advantaging larger employers.” The ability of small firms to pay for this wage increase is limited. Large firms have access to credit that can help the accommodation to a new high wage economy. For example, credit is necessary to buy expensive technologies that increase automation. Yet, if the effect is large, corporations are unlikely to hire all those laid off from small firms. Workers who are laid off may have the outside option of working in the so-called ‘sharing economy.’ Low wage workers face obstacles to join the sharing economy. For example, there are usually high standards of entrance. Another problem facing low wage workers is the recession in the retail sector (link).
Finally, higher wages decrease the relative cost of capital. In other words, robots become much cheaper. The increased competency in the average consumer’s use of technology makes it easier for firms to replace frontline staff. This is already the case for McDonalds, where touch screens dominate. The substitution of labour is not a static variable, it can increase or decrease. It is likely that a higher minimum wage will accelerate the process of automation and increase the substitutability of labour.