Saturday, February 15, 2014

Minimum Wage to Increase

The Government of Ontario recently announced that the minimum wage will rise from $10.25 to $11/hour as of June 1, and then be indexed to inflation afterwards.

The immediate increase essentially represents an inflationary increase from 2010, when it last increased.  Tying it to inflation moving forward could be a perpetual solution to the historical stop-and-go movement of the minimum wage.

There are a number of anti-poverty advocates arguing for a $14/hour minimum wage, pointing out that a full-time worker making $11/hour is still under the poverty line; Premier Wynne responds that such a significant increase would be too much for business to absorb at once.

There are several philosophies on the minimum wage - some believe that it is an unwarranted and harmful interference in the market, that having a minimum wage destroys jobs, that raising it will destroy more.  The status quo has long been that a modest minimum wage is a fair way of combating poverty.  A more progressive approach entails a minimum wage that ensures a reasonable standard of living.  Then there are more revolutionary ideas, alternatives to the minimum wage such as a guaranteed income or guaranteed minimum income.

The status quo is 'safe', and indexing minimum wage to inflation is an inherently safe approach.  At the end of the day, though, the policy analysis for the alternatives is very complicated.

Poverty Wages and Indirect Subsidies

There's an oft-ignored aspect of the minimum wage debate:  To the extent that an individual, who is working full time, can't make ends meet, they end up reliant on the taxpayer to get assistance with the shortfall.  This amounts to a government subsidy of low-wage industries.

Everyone needs a certain basic standard of living.  Food, clean water, shelter, electricity, clothing, transportation, health care, etc.  Without these things, people cannot survive.  There have been times in the past when employers were prepared to work impoverished unskilled labourers to death, literally, knowing that there are ten more to take his place.  However, it's really no way to run a business, and moreover from a public policy perspective it is not a result that we will tolerate.  So the government (and sometimes the public too) steps in to assist impoverished workers to maintain a basic standard of living.

There are a number of different ways of 'valuing' labour, but there is no cogent method that will result in a value of labour such that full time labour will not provide sufficient money for the subsistence of the labourer.  Simply put, the subsistence costs of the labourer are the lowest possible base cost of producing the labour, and it is never economical to perpetually sell something for less than the cost of production.  Which means that, if I'm paying you less than a living wage, and you're turning to the government to make up the shortfall, the result is that the taxpayer is subsidizing the cost of production of the labour I'm receiving.

That's a subsidy.  We as taxpayers are indirectly paying the cost of production of all companies that pay less than a living wage.

Distribution of Profits and Direct Subsidies

The concern, of course, is that if we increase the minimum wage, businesses will close down, or reduce staff - instead of their workers becoming less reliant on government, their workers will become entirely reliant on government.

However, while this threat has a simplistic weight to it, it's more complicated than that.

Firstly, the vast majority of minimum wage employees are working for business models which could theoretically absorb the increased cost.  But to understand the challenges in raising the minimum wage, we need to understand where that money goes:  A great many minimum wage employers are large franchise arrangements.  Consider Tim Hortons:  Almost all Tim Hortons stores are owned by small businesses, with no more than a handful of stores.  The owner of the store makes some money, though not a huge amount, and would have a hard time bearing an increase in the minimum wage.

Tim Hortons as a business, however, is quite lucrative.  The franchisor (and its shareholders) make a significant amount of money off of each store, and the franchise agreement are negotiated in such a way, based on the relative bargaining power of the parties, to maximize the prospect of it being a beneficial arrangement on both sides.

Gradual increases to minimum wages will change that calculation.  It will have the result that the franchisees will require a better deal from corporate Tim Hortons in order to keep their stores profitable.  And corporate Tim Hortons wants to keep the stores profitable, and therefore will have to concede.  Too much of an increase, however, at too fast a rate, risks an inability to make the necessary adjustments.

Secondly, while there are business models, or individual businesses, that would struggle with the minimum wage increase, the change does not necessarily result in them going under.  It puts us into the position of having to choose:  Is this business worth subsidizing?  Or should we let this business, which cannot afford to pay the cost of its own production, go out of business and leave a void in the market for a stronger business model to fill?

By making that choice, we start to ask the right questions - it's no longer about giving charity to low-paid workers, but rather about whether or not a business provides enough social value to warrant spending taxpayer money to keep it afloat.  And remember, we're already doing that, not only for the businesses that need help, but also for immensely profitable chains.

In other words, there is no compelling policy reason for a perpetual minimum wage below the poverty line.  Though I would tend to argue for a gradual shift to a living wage.

Guaranteed Minimum Income

There are other theories of how to approach the minimum wage.  One is to expand the welfare system, to provide a guaranteed minimum salary on the scale of a living wage, with partial clawbacks as people start making money, without needing to enforce a minimum wage.

It's the worst of all worlds, in my view.  It means that we're immensely subsidizing companies who hire low-paid employees, and devaluing labour; it messes with the incentives because there's less reason to take a low-paid job...basically, unless you hit exactly the right balance, you'd end up either with a labour shortage, and nobody willing to work at Tim Hortons for wages it can afford to pay, or you'd end up still with a surplus of unskilled labour, and therefore Tim Hortons would be able to pay rock-bottom wages and we're picking up the tab for the labour costs.

Guaranteed Income, Simpliciter

This is an interesting theory.  The cost is likely immense, and probably impractical without a fairly significant reorganization of our tax system, but still interesting.  It's being canvassed in a Swiss referendum, and worth paying attention to, at least.

In practice, it's exceedingly simple:  Give a monthly cheque to everyone.  Don't make it need-based, don't claw it back from people making money (except via income tax), don't ask people to prove eligibility...just keep sending cheques.

It shouldn't be a huge amount of money - just enough that people without jobs can scrape by.  If you want to do more than merely scrape by, you need to work for that money.  Minimum wage would be unimportant.

There are down sides.  It messes with incentives, though not as much as a guaranteed minimum income would - this way, you aren't punished by clawbacks for actually getting a job.  It could create a labour shortage in certain areas, though.  And there's a concern of a 'welfare culture' - i.e. that making it too easy to live perpetually without a job will endorse a set of values in some communities that you don't need to get a job.

Most importantly, the cost of the program would be prohibitive.  I won't take you through the math, but suffice it to say that we'd need to pay a lot more taxes (probably largely through increased VATs) to even imagine making it work.

But there are huge theoretical advantages, too:  Poverty is associated with a lot of social costs - the poor tend to have higher health care needs, tend to engage more frequently in criminal activity, not to mention the huge administrative and oversight costs associated with current social assistance programs, trying to filter out folks who aren't eligible.  Giving people enough to live on would result in less crime, less strain on our health care system, and improved effectiveness of education for facilitating greater economic activity in the long term.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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