Title: The minimum wage balancing act
Sub-title: There may be downsides to raising minimum wage rates during tough economic times.
News last week that Canada’s unemployment rate bounced back up to 8.0 percent spread new doubts regarding the solidity of the country’s economic recovery. Yet during that same time period, seven of Canada’s provinces raised minimum wage rates, which makes it more expensive and thus harder for businesses to hire workers.
The two contradictory trends illustrate starkly the balancing act that public officials face. While on one hand they face substantial public pressure to help the tens of thousands of workers who are trying to get into the job market, they also need to make sure that companies don’t overly exploit of those that do.
Why minimum wages?
Governments get involved in mandating a minimum wage for one simple reason: if they don’t businesses will take advantage of their employees, sometimes to excess. The Canadian Center for Policy Alternatives has done interesting research in this area. In 2008, the organization calculated that the “living wage,” (what in a family of four, with two workers would have to earn, to pay basic subsistence living expenses) in British Columbia was $16.74 per hour. By 2010 the organization had raised that amount to $18.17 per hour, due to sharp increases in rent and food costs there. However the province’s minimum wage is just $8.00 an hour, far less than what British Columbians from any category need to survive.
Minimum wage rates affect a surprisingly large number of people. According to Statistics Canada, close to 750,000 Canadians, or 5.2 percent of the labor force, worked at or below to the minimum wage in 2008.
Governments have been trying to address the unequal balance of power between business and labor in wage arbitration since at least 1918, when the first minimum wage laws were passed in British Columbia and Manitoba. In Canada, provinces and territories are responsible for setting up and enforcing labor laws. This means there is a wide disparity between minimum wage rates across the land, ranging from $10.25 per hour in Ontario, to British Columbia’s $8.00 per hour rate.
The argument for businesses
Yet while it is tempting to raise the minimum wage rates that businesses need to pay, things are not that simple says Dave Bryans, president of the Canadian Convenience Store Association. “Many of our member stores are operated by new Canadians and have very low profit margins. When governments raise minimum wages, they often can’t afford to pay the increases. So they have to slash working hours, and must instead put in the extra hours themselves,” says Bryans. “You would not believe how long the workweeks of some convenience store operators are.”
Bryans may be on to something. Economists say that when you raise the price of something, people will want less of it. If governments force businesses to pay too much for labor, the argument goes, then they will try to do without it (by for example, buying more productivity-enhancing machinery). The other problem is that many businesses operate on the edge of solvency. Raise the wages they need to pay their workers, and not only do you make it hard for them to hire, you risk sending the entire firm into bankruptcy.
The government of Saskatchewan appears to agree with that point of view: in late July it announced that it was freezing its minimum wage rate at $9.25 for the foreseeable future. The government was acting on a recommendation from a review panel which said that “…a further increase in the minimum wage may impact of the competitiveness of Saskatchewan businesses compared to their counterparts in other provinces.”
Governments need to run a tight balancing act
Saskatchewan’s decision comes at a particularly fluid moment for the Canadian economy. While close to 200,000 jobs have been created during the past six months, employment has yet to fully rebound to pre-recession levels in many of the country’s regions, yet alone keep pace with natural labor force growth, a fact that the Saskatchewan panel took into account before rendering its decision.
Mark Beazly, a spokesperson for the Retail Council of Canada, lauds Saskatchewan’s balanced approach. “Minimum wage changes need to be linked to the state of the economy at any given time,” says Beazly. “Governments should at least consult with businesses before they take any action. And increases when they occur, should be in small increments, spread out over a relative long period of time, to give businesses time to adjust.”
However Hugh MacKenzie, en economist with the Canadian Center for Policy Alternatives disagrees with much of the analysis supplied by business experts. “Taking advantage of tough current troubles to suppress wage increases is completely not on the level,” says MacKenzie. “There is simply no evidence that restricting minimum wages leads to job creation.”
With a consensus like that, no wonder politicians have such a hard time setting ideal minimum wage levels.
Peter Diekmeyer (email@example.com) is a Montreal-based freelance business writer.
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