On the sins of wages — when set by governments
Ontario Premier Kathleen Wynne said Monday her government will hike the province's minimum wage, with the new rate to be announced later this week.
Photograph by: Aaron Vincent Elkaim/THE CANADIAN PRESS/File, Postmedia News
The thing that always stands out about proposals to raise the minimum wage is how chintzy they are. The government of Ontario, for example, is reportedly about to raise the provincial minimum wage to as much as $11 an hour, which would make it the highest in the country (tied with Nunavut). On the other hand, that’s no more than what it was in 2010, after inflation.
In which case, why stop there? What’s so special about 2010 as a benchmark? Why not $14 an hour, as a coalition of unions and activist groups are demanding? Why not the $16.50 the mayor of Seattle has proposed? Why not the $18 to $20 deemed a decent minimum by proponents of a “living wage”? Why not $30? Or $40?
Don’t roll your eyes at me. As long as we’re picking numbers out of the air (where did that $14 number come from? Because it’s 10 per cent more than what someone at Statistics Canada’s low-income cutoff would earn per hour, if he were working full-time. But then why is 10 per cent the appropriate margin? Why not 20 per cent? Or 30 per cent?), what’s stopping us? If there is no demand curve for labour, if we can just set wages at any level we like with no impact on employment, why be so weak-willed about it?
Or is it imagined that above some level, jobs would be lost, but not below it? Employment is generally sensitive to wages, but not for the most vulnerable, low-skilled workers, with the least market power? And how is it that the level at which jobs become a concern is always higher than whatever is being proposed? The premier of Ontario thinks raising the minimum wage all the way to $14 would be too much, whereas $11 would be just right. But who’s to say it isn’t too high as it is?
And yet here we are again, with proposals to raise the minimum wage sweeping the continent. More than 30 states are considering legislation of some kind to that effect, while the president is set to make the issue the centrepiece of his State of the Union address. And where Ontario goes, the other provinces are sure to follow. It’s progress that the inequality debate is now focusing on raising up the poor, rather than tearing down the rich. But there could hardly be a less effective, more ill-targeted way to go about it.
The popularity of minimum wage laws has much in common with that of similar interventions, like rent controls, that pursue distributional ends by means of regulating prices: They allow us to believe we can intervene without really intervening. They seem less intrusive than more overt forms of redistribution. Guarantee everyone a minimum income, paid for by the state? That’s communism. But demand that business pay their workers more? That’s just the market at work — with maybe a little nudge from government.
The problem is that simply fixing wages in law doesn’t necessarily force businesses to pay more. If the price of an hour of labour has gone up, the natural and predictable response is to hire fewer hours of labour, at the margin: Either take on fewer workers, or give them fewer hours. Those that keep their jobs may do a little better — especially those earning more than the minimum, who face less competitive pressure to temper their own wage demands — but at the cost of those priced out of work.
This is the consequence of trying to do social justice on the cheap. The concern for the incomes of those at the bottom is a social concern. It reflects a collective judgment of what is a just distribution of income. As such, it is properly a social and collective responsibility, one that should be paid for socially and collectively — not offloaded onto a small group whom we hope to stick with the bill, while at the same time providing them the direct means and incentive to evade it.
It has always been a valid critique of the market that it does not and cannot produce a fair distributional outcome. That does not change just because you tie a regulatory bow on it. Indeed, the minimum wage is particularly ineffective at fighting poverty, as much research has shown: Few people in poverty are employed at any wage, and for those that are the issue is typically too few hours, not too low wages. Only a small proportion of those at work earn the minimum wage, and only a small proportion of those on minimum wage work full time. Most are part-timers, second earners, students. So even if there were no adverse employment effects, it wouldn’t make more than a small dent in the poverty rolls.
If we really want to help the poor, here’s a radical idea: Give them more money. Only do so directly, using the tax and transfer system, rather than fixing wages and hoping some of it reaches them. Take from the rich and give to the poor, and at least you have some idea of who is paying, and who is benefiting, with less room for the former group to evade their responsibilities to the latter. And you leave wages to get on with the job for which they were intended, which is to see that all available labour is employed.
Whether or not this goes as far as a universal income guarantee, or builds on the success of existing support programs like the Working Income Tax Benefit, the Guaranteed Income Supplement, or the National Child Tax Benefit, the principle is the same. It’s a minimum income that should be our objective, not a minimum wage.