Side effects

This year provincial governments have been raising the minimum wage.

In Ontario the newly elected Liberals fulfilled a pledge by raising the minimum wage to $11 an hour, and last May in Quebec the minimum was boosted to $10.35 an hour. These moves seem to ignore how the free market system actually works.

These changes probably were motivated by attempts to help lower income workers, but these actions block the way the market determines the pricing of labour. This will entail some unanticipated side effects that are undesirable.

If governments wanted to eliminate the problem of low-priced labour, obviously a worthwhile goal, how about increasing the minimum wage to say $50 an hour and managing to persuade unions to help accomplish that objective?

In other words, if by statutory legislation the minimum wage could rise substantially, why not go for a really big jump? In any event, how is the number determined?

What would be the result/effects of such legislation in Ontario and the other parts of Canada? When we see the effects, then the clamour for pushing up the minimum wage would be constrained by a reality check.

Low wages reflect the low productivity of marginal workers. If their wages were to rise disproportionately, the disadvantages of their low productivity would be exacerbated. Then business would try to compensate by trimming other elements of cost, even moving to other locations with cheaper labour. Thus, one result of that higher minimum wage would be more unemployment for the people it intended to help.

It must be acknowledged, however, that the higher income of those now earning more money will help business. Companies will feel the need to raise prices, but to some extent these workers now earning more money from the higher minimum wage will be able to afford to spend more money.

Businesses adversely affected by needing to pay higher wages simply may curtail services: fewer sales personnel, eliminating some deliveries or shorter working hours. Some may close down entirely as the higher cost will destroy the profitability of that enterprise.

Also, possibly capital will be deployed elsewhere maybe using techniques that prune cost, or switching to other products that require less labour, and could be less helpful to the consumer. If a business cannot afford to provide a decent wage, perhaps it should not be operating at all.

Needless to say, there are strong moral arguments for changes in the wage structure, but the economic effects are controversial.

A thoughtful social policy must balance all the pros and cons of raising the minimum wage.


Bruce Whitestone