“The Simple Truth on Minimum Wages: That It’s Not So Simple” By Ted Mallett, VP/Chief Economist, Canadian Federation of Independent Business

Oct 6, 2011 | Corporate Member News

There are many things in life that I would really like to be true all the time. For instance, I can only imagine what mealtimes would be like in a world where a rule “If it tastes good, then it must be good for you” always applies. Maybe that is just me, but the same applies to thoughts on how societies should function. Alas, despite these hopes, I find that things aren’t so simple.

Honestly, I really wish that society could reduce or eliminate poverty with a sweet and simple policy like minimum wage. I mean who doesn’t? We see most of the general public supporting increases in the minimum wage. And, as experts in political math, our elected representatives are only too happy to oblige. So, in a time of economic turbulence where people are more concerned about wellbeing, it is no real surprise that minimum wages, depending on the province, have increased between 18% and 33% in the past four years. But as with good-tasting food, good-sounding policy usually leads to unintended consequences. In the case of minimum wages, the counterbalance is employment—particularly among the young and inexperienced.

Unfortunately, it is not so simple to raise any concerns about a policy to a great many people who think it is so simple. Any debate about the usefulness of minimum wage policy invariably and wrongly gets parsed down to one of ‘employer versus employee’. Because there are a many more employees than employers, we know who will win a debate on that kind of playing field. CFIB’s approach has been to attempt a reframe of the debate. It involves saying that, other than the pain of transition, employers are not really affected in the long run because they will adjust their operations to compensate. In reality, the true victims are the other employees who lose hours or get shut out of job opportunities entirely. The winners are workers, indeed, but only those who are lucky enough to retain their number of hours of work. Even so, they don’t get to keep all of the benefit since tax and source deductions will claim a chunk.

How big is its effect on employment? That depends obviously on the scale of wage increase. The body of evidence collected by CFIB from dozens of studies conducted by economists in recent years suggests that for every 10% increase in minimum wage, employment of minimum wage workers falls between 1% and 4% depending on the type of job or sector. It would be nice to have more precise estimates, but there is simply no way to get enough data to filter out the effect of the countless other economic influences on wages and employment. Some have taken the imprecision as a sign of proof that no real impact exists, but overall, there are few areas of economics where practitioners have been more unanimous.

As challenging the issue is in the public policy arena, it is in the workplace where the real impacts are felt. Individual employee pay levels ultimately depend on the productive value they bring into the business. Most businesses don’t operate with many minimum wage employees, if at all, so they tend not to be affected significantly by minimum wage legislation. However, others, due to the nature or structure of their business, rely on that form of employment. It may sound cold, but one cannot really expect that employees be paid beyond their level of contribution. Those are the ones who get dropped. Employers also tell us they face internal friction because experienced employees who have earned progressive wage increases due to their higher skills are suddenly paid much closer to that of raw recruits. The equation thus tilts toward employers opting for fewer, more experienced employees or, if possible, alternatives like outsourcing or greater reliance on capital equipment.

Minimum wages are now in the region of $10/hour. No one I know is suggesting we backtrack on the increases that have already taken place. But in the future, we need to look at more targeted policies like employment tax credits or the basic personal exemption levels to address low income and retain opportunities for young people to move into productive jobs. That would be a simpler solution—one worth chewing on.

This article originally appeared in KPMG’s Business Advisor – Fall 2011. The newsletter also contained (click on title to access):

Innovation starts and stops with people
 Read the article 

The simple truth on minimum wages: that it’s not so simple 
 Read the article 

Reducing taxes can increase wealth  
 Read the article 

Insight into Next Generation 
 Read the article 

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is devoted exclusively to helping business owners and entrepreneurs build thriving enterprises. For further information about how KPMG Enterprise can help private companies, visit www.kpmg.ca/enterprise.

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