Relax, Ontario’s minimum wage increase will not lead to massive job losses

The overwhelmingly alarmist rhetoric regarding Ontario’s recent minimum wage increase is due largely to a misinterpretation of basic facts, say two prominent Canadian bank economists.

“People have a tendency to focus on counter-factual headlines,” TD Bank’s Brian DePratto told VICE Money. “We’re talking about a very miniscule fraction of overall employment that will be affected by the minimum wage increase.”

A recent study from the Bank of Canada forecasted that minimum wage hikes across nine provinces in 2018 and 2019 will result in “employment losses of about 60,000 workers”, equivalent to a 0.3 percent decline in the overall number of hours worked.

Mainstream Canadian media was awash with headlines highlighting the “60,000” figure, which is indeed significant if viewed in isolation of the overall employment trend in Canada’s economy, especially of late.

“The Bank of Canada report was very badly reported by the media,” said Brett House, Deputy Chief Economist at Scotiabank. “The headline of that report should have said: ‘macroeconomic effect of minimum wage hike likely to be within margin of error’. There’s going to be a negligible effect on the macroeconomy, and a very positive effect on low wage earners.”

House points out that employment losses of 60,000 doesn’t necessarily mean 60,000 existing jobs will be lost due to the minimum wage hike — it implies 60,000 fewer jobs than projected will be created in the next year or so. For context, the Canadian economy created 79,000 jobs in December, and 79,500 jobs in November. In the year 2017 alone, Canada created 423,000 jobs — 394,200 of those jobs were full-time.

In Ontario, the minimum wage increase ($11.60 to $14 an hour) is estimated to impact eight percent of all workers — an additional 15 percent of workers will probably also see a rise in their wages as a result of the minimum wage increase, simply because the wage floor moves up, say economists.

“One of the most important things to keep in mind is that the real minimum wage, adjusted for inflation, has more or less been constant since the late 70s and early 80s,” says House.
“That means, we’re really not seen a change in wages at all for the last three to four decades, while the cost of living has gone up.”

That, coupled with the fact that the share of workers in minimum wage jobs has grown fivefold since 1997 (according to data from the left-leaning Canadian Centre for Policy Alternatives), is reason enough for governments to raise the minimum wage, both DePratto and House say.

Employers versus Employees

One of the unintended consequences of any kind of wage hike, is employers passing that additional cost down to their employees. Multiple Tim Hortons franchises in Leamington, Port Hope and Cobourg, as well as several Sunset Grill locations have reportedly adjusted their benefits and tipping policies in order to absorb the minimum wage hike.

“It’s very challenging for businesses. Franchises and independent businesses don’t have as much pricing control as larger businesses and industries,” says DePratto. “But when prices of coffee beans go up, or prices of avocados go up, and businesses try to cut costs in similar ways, it just doesn’t get the same amount of attention as when the government is involved.”

House believes that businesses don’t necessarily have to make their employees bear the brunt of minimum wage hikes. “Many companies have found that treating their workers well, giving them good benefits and perks, is a recipe for high performance in the long run. So it depends on how you view the growth of your company.”

The poorer you are, the more you consume

Another factor frequently ignored by those against minimum wage hikes is the extent to which boosting the minimum wage boosts consumption. “When higher income households see wage gains, some of it goes to savings,” wrote Armine Yalnizyan in a recent Macleans’ op-ed. “But when lower income households see a sustained rise in incomes, they spend virtually all of it.”

If this economic concept, known as the marginal propensity to consume, actually plays out in reality (evidence suggests it does), then businesses will actually benefit from a rise in wages. What more, household purchases account for 57 percent of Canadian GDP — human consumption is a massive driver of economic growth in Canada.

“There’s a sweet spot governments want to hit in terms of ensuring that their policies provide for stable and effective employment, as well as not going so far as to undermine the economic rationale for doing business,” says House.

“Given the current income disparity, ensuring that every layer of society participates in the economic rebound that we’re seeing does necessitate increasing the minimum wage.”

Follow Vanmala on Twitter