The economic case for a higher minimum wage

Posted on July 30, 2017 in Policy Context – Opinion/Editorials – The arguments against the $15 minimum wage don’t hold up — and the choice between social and economic ends is a false one.
July 29, 2017.   By

The public hearings on Ontario’s proposed minimum-wage hike, which wrapped up last week, produced predictable clashes. Unions and social-justice advocates pointed out, among other things, that the minimum wage is too low today to keep workers out of poverty, even if they work full-time, while defenders of business, big and small, warned of dire consequences if the legislation is passed: cataclysmic job losses and business closures, an economy in ashes.

“There is no question that the proposed changes … will put the success and competitiveness of Ontario’s business community in jeopardy, particularly our small business community,” said Ashley Challinor, director of policy for the Ontario Chamber of Commerce, in a typical caution.

The debate over wages has forever pitted employers against workers and those worried primarily about economic health against those worried primarily about economic justice. But in light of what we now know, there’s every reason for all parties to come together and support the package of labour reforms now before Ontarians.

The arguments against the $15 minimum wage don’t hold up — and the choice between social and economic ends is a false one. A cross-partisan consensus is emerging among economists that decent wages and decent work are good, not just for workers, but also for the economy.

It is not at all clear, for one thing, that the job losses predicted by the business lobby will actually occur. While some studies have shown hikes can have an impact on employment, the effect is not nearly as significant as those with a vested interest in keeping wages low claim.

Last month, 53 economists signed a letter in support of Ontario’s plan, pointing to a number of encouraging relevant examples in the U.S. In states such as New York, California and Washington, which have significantly increased the minimum wage in recent years, we are seeing that such hikes are not the job-killers they’re purported to be. Or, in the language of the economists: “The weight of evidence from the United States points to job loss effects that are statistically indistinguishable from zero.”

For as long as there has been a minimum wage there have been business advocates overstating the likely costs of raising it. In 2011, to take one recent example, British Columbia boosted its minimum wage from $8 to $10.25 over the course of a year. The Fraser Institute, a right-leaning think tank, estimated this would lead to as many as 55,000 lost jobs. In the end, however, the reality was about one-sixteenth as bad, and the vast majority of job losses affected teenagers. (Ontario’s plan wisely maintains a slightly lower minimum wage for certain categories, including for those 18 or younger.)

While the costs of wage hikes are consistently exaggerated, the body of evidence for their benefits is growing.

As the Canadian economists wrote in their letter, a minimum-wage hike may well spur “economic revival.” Domestic consumption is the largest driver of the Canadian economy; household purchases account for 57 per cent of our GDP. Meanwhile, the growing group of minimum-wage earners, who currently comprise about 10 per cent of the workforce, spend a larger portion of their income than any other workers. When they make more, they spend more. As their number grows, so too does the importance of their wages to the overall economy. The hike promises to boost demand significantly and, in turn, economic growth.

Moreover, study after study has shown that higher wages improve businesses’ productivity by raising morale, reducing turnover and training costs and improving the quality of job applicants. Employees are thought to be less likely to shirk because they care more about losing their jobs. Studies suggest employers offset something like half the costs of wage hikes through improved productivity alone.

Of course, all policies have costs, and this one will no doubt cause some short-term pain for employers and perhaps even lead to some job losses. Clearly these consequences should not be dismissed; Premier Kathleen Wynne is right to continue to consult with small businesses about ways to mitigate them.

But the evidence suggests that, in their grimness, the warnings of the business lobby are vastly overblown. Indeed, they are backwards in the sense that, even over the medium term, the hike promises significant economic benefits, not catastrophe.

It is particularly hard to credit some of the corporate giants among the critical chorus, from Loblaw to Magna, which have claimed that the proposed hike and the other labour protections being pursued are unfair to them. For companies such as these, with enormous annual profits and astronomical executive compensation packages, the warnings of doom are a rather tough sell.

Policymakers at Queen’s Park have rightly determined that the true cost of the hike, so often overstated, is justified by the overdue protections for workers and by the boon to the economy. They are part of a growing movement across North America and beyond that recognizes decent jobs and decent wages are not simply moral goals; they are also essential to our economic well-being.

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One Response to “The economic case for a higher minimum wage”

  1. Ashley says:

    Dear Editor,

    This article points out some important points between the differing perspectives surrounding this controversial debate. The authors state that when it comes to the minimum wage debate there are “those concerned mainly about the economic repercussions of higher minimum wages against those that are fighting for economic justice”. This divide reminds me that with every social policy debate there are a wide range of different stakeholders whether that be service providers, businesses, consumers, or even social workers and that we need to understand where our point of view is derived from.The authors focus on several points and examples of how an increase in minimum wage can have positive effects on the economy. For example the authors touch on the idea that “when people make more they spend more”. This idea of boosting spending power for low wage earners can be linked to the ideals of Keynesianism and generally that “if you give people more money they will spend more”. It is important that people concerned solely about the economic repercussions and not on social or economic justice take into consideration the role that these low wage earners have on the economy as this population makes up a significant part of the consumer population. I agree decent wages is not only good for low income workers but is also essential for our economic well being.


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