The unintended consequences of a higher minimum wage will end up hurting exactly those that governments are trying to help.
Ontario and Alberta will soon dramatically increase their minimum wages to $15 an hour. Unfortunately, these fast and sizable minimum-wage increases are likely going to reduce employment and increase poverty, particularly for the low-income families that the governments are seeking to help.
The Ontario government introduced legislation on June 1 to raise its minimum wage from $11.40 an hour to $14 next year and then to $15 on Jan. 1, 2019. As soon as Jan. 1, 2018, Ontario will face – under the legislation – the largest one-year increase in the minimum wage rate (22.8 per cent) of any province over the past two decades.
In June, 2015, Alberta was the first province to plan a $15 minimum wage, which would amount to a 47-per-cent increase from the then-current $10.20 over four years. Although this is Canada’s largest four-year increase in a minimum wage in the past 20 years, the changes there are more gradual than under Ontario’s plan.
Ontario Premier Kathleen Wynne said the changes will improve the standard of living for low-income families. But the government should be concerned that a significant increase in the minimum wage will likely reduce employment.
Ontario has the largest share of employees earning the minimum wage among Canadian provinces. As a result, the impact of hiking minimum wages to $15-an-hour levels will be more severe in Ontario than in Alberta.
Lower-wage industries are at the highest risk. A reduction in net job creation in sectors such as restaurants and services seems to be unavoidable.
More workers in low-income occupations, coupled with faster growth in the minimum wage, increases the cost of labour and reduces the profitability of companies. As a result, employers will be forced to increase their prices, reduce their production or close altogether. This leads to higher unemployment among more vulnerable employees.
Employees earning minimum wage are more likely to have a contract or part-time job. They are also more likely to be less skilled and young with no experience. As such, they are the kind of employees that companies can most easily do without.
This reduction in employment ends up putting more vulnerable families in poverty. A study of past Canadian increases in the minimum wage found that teen employment dropped considerably. These teens were important earners for low-income families. The result was more families falling below low-income cut offs.
These results show that Alberta and Ontario need to rethink how they increase their minimum wages. What should they do?
Ontario and Alberta need to move to a higher minimum wage more gradually. Companies need time to adjust. This is particularly important for small-sized enterprises.
The ability of business owners to manage the minimum wage varies by region, as does the cost of living. The impact of minimum wage on workers and businesses in Toronto or Calgary is different from those in rural areas, where firms are often smaller and living costs are lower. The provinces should consider a lower minimum wage outside of cities.
There also needs to be flexibility to delay minimum-wage increases in case of a recession. This is what California has allowed for as it phases in a higher minimum wage. Neither Alberta nor Ontario have such flexibility in place.
In short, a higher minimum wage requires a flexible and well-designed plan to increase the minimum wage to minimize the impact on the economy and workers. Otherwise, the unintended consequences of a higher minimum wage will end up hurting exactly those that governments are trying to help.
Parisa Mahboubi is a senior policy analyst at the C.D. Howe Institute
Published in the Globe and Mail