By all accounts, Ontario’s 2017 minimum wage increase was an overreaction to the tough recession. Ontario’s minimum wage increase was not only onerous to millions of small businesses, but was a massive impediment to their ability to attract and retain workers and thrive.
Despite the obvious mistakes that occurred, it’s now time to seriously consider what should happen next.
Labor economist Timothy Ubertaccio at the Competitive Enterprise Institute recently suggested that the Ontario government actually needn’t have increased its minimum wage as much as it did. After all, other provinces had not increased their minimum wages to levels that Ontario did.
For instance, the Ontario minimum wage increased by just $1 per hour earlier this year—from $11.60 per hour to $11.60 per hour. And Quebec’s minimum wage remained at $10.25 per hour. When a province doesn’t increase its minimum wage, it only makes sense that one will raise it every year, or perhaps incrementally, to avoid the rampant unemployment that is a sure-fire way to reduce the purchasing power of all workers.
A more sensible minimum wage would rise to match the rate of inflation—at a rate of about one percent a year. Not only would this result in the minimum wage being higher by all the other provinces in Canada, but it would bring the Ontario minimum wage in line with its own fiscal regime, which since 2015 has allowed the Ontario minimum wage to be set not by provincial government, but by a “Fair Workplaces, Better Jobs” panel.
At the very least, this makes sense in Canada.
Ontario’s minimum wage was established to bring Ontario in line with other provinces and to reduce the poverty, hardship, and precariousness that is inherent to living in a high minimum wage economy. Unfortunately, minimum wage policy doesn’t move in a straight line—instead, it affects different workers in different ways.
Although the Ontario government ultimately raised its minimum wage by just $1 per hour, the authors of a recent CEI paper found that the lower increases came at a much bigger cost to the highly compensated workers who had been originally scheduled to see their hourly wages increase. By canceling their higher raises, the minimum wage increases of 2017 freed up even more money for the lowest-paid minimum wage workers.
To be sure, Ontario’s 2017 minimum wage increase was disastrous for small businesses. A lot of lost jobs, lower consumer spending, and reduced hiring are all outcomes of imposing an excessively high minimum wage. But fixing what ails minimum wage policy might require something beyond the occasional tweak to the formula.
First, we should look at what’s wrong with minimum wage regulation in the first place. A job-killing minimum wage, in combination with other mandates, tends to punish and demoralize workers who are already living at the margins, no matter what their job quality. To incentivize employment rather than penalize employment, the minimum wage should be adjusted to better reflect market value rather than standard unemployment levels.
Second, the federal minimum wage needs to be improved. Currently, the federal minimum wage is $14 per hour, which the Trudeau government could easily raise to $15, although $16.50 would seem more appropriate for small businesses. Even a modest increase to $15 per hour would increase the purchasing power of workers by $1500 every year, helping to mitigate the living wage problem. That would make a real difference in the lives of low-wage workers.
If we want to maximize our happiness, we should make income inequality less important than quality of life. A minimum wage that rises in proportion to inflation is an easy way to address income inequality while supporting workers in need.
It’s time to stop giving wage drives an outsize voice in our policy debates. The collective decision of a government not to increase the minimum wage might actually be more effective than the extreme reaction we saw last year.
Benjamin Zycher is a senior fellow at the American Enterprise Institute and chief economist at the Free Enterprise Fund.