Analysis

Ontario's experiment with minimum wage could transform Canada's economy: Don Pittis

A sharp and sudden rise in the Ontario minimum wage could tranform the Canadian economy. But no one's really sure whether it will be for the better or the worse.

We're the guinea pigs in a real-life research project, and no one can be sure how it will turn out

The spillover effects of a 21 per cent increase in the Ontario minimum wage could affect the entire Canadian economy. Despite strong views on the subject, no one knows for sure if the results will be good or bad. (Evan Mitsui/CBC)

Reading any statement from an economist on the subject of minimum wage, you might think the eventual results are unequivocal and well understood.

The strongest critics of Ontario's sharp hike on Jan. 1 in the hourly rate from $11.60 to $14 use traditional economics to predict certain doom for an economy devastated by plunging employment.

Of course, supporters of the increase take the opposite view, saying it will stimulate the economy by putting money into the hands of the poorest, who will actually spend it.

In spite of research purporting to support these opposing sides, the issues are so complex, so entangled with other economic impacts, with politics, with emotion, that exactly how the rise in wages will play out is far from certain.

Economists around the world are enthralled by what is effectively a huge and radical real-life experiment. The laboratory is the Canadian economy. The lab rats are us.
Portuguese demonstrators demand a minimum wage of €600 a month, just less than $900 Cdn, in November 2017. (Rafael Marchante/Reuters)

And partly because Ontario's 21 per cent increase is so steep, no one is really sure how it will turn out, says labour economist David Green.

"Most economists, even economists on the left, are worried about how fast that is going up," says Green, a professor at the University of British Columbia who has made a career of studying how the price of labour affects other parts of the economy.

While this increase is happening in a single province, that province is Canada's most populous and most industrialized. It includes rich cities and rural backwaters. And if it damages the economy, it is reasonable to assume that damage will have an impact across the country.

Whether it succeeds or fails, and how, will stand as a lesson for other jurisdictions.

Unique opportunity for economists

For economists, used to having to extract meaning amid the noise of other economic forces, this sudden change in the price of labour is a unique opportunity.

"When you see a wage go up, you're like, is that because demand has increased? Is it because supply has increased? How are those things interacting?" Green explains. "Here somebody actually comes along and just moves a price for you. And so you get to see things that help us understand how the labour market works."

As Yale economist Robert Shiller observed last year, the things that move our economy are seldom clinical and mechanical. Often far more important is the story we tell ourselves about what is happening — what he calls "narrative economics."
When this picture was taken in 2016, Toronto resident Keyur Morthana was earning minimum wage but said he survived big-city prices by working seven days a week. (Don Pittis/CBC )

Part of the current popular narrative is the growing gap between rich and poor, which, as polls have repeatedly shown, Canadians don't like.

Observe the astonishing reaction to the CBC News story broken last week by Aaron Saltzman, with the narrative of super-wealthy Tim Hortons bosses wintering at their southern estate while cutting the benefits of the minimum-wage workers who help generate their wealth.

Previous attempts to redistribute wealth through tax reform have faced a traditional-media backlash.

But this time, the social media narrative indicates a widespread acceptance of the wage increase as a means of improving the balance between rich and poor even if it results in an increase in consumer prices.

Previous studies have shown price increases will come, but economists say they should be small. For example, if minimum-wage labour contributes 10 per cent of a product's value, final prices would rise by about two per cent.

Sometimes outside forces such as competition or a consumer backlash mean business owners must swallow some of the cost increase out of their profits or look for savings elsewhere.

Will poor people be worse off?

A minimum-wage hike is not necessarily bad for business, because all businesses have to pay it. Some say businesses will move operations to lower-wage parts of the world, but even that is disputed. Others say the poor will be worst affected as consumer prices rise.

Other strange features have been observed following minimum-wage increases. One is that after a hike, layoffs actually go down. Companies known to profit by paying their workers well, such as B.C.'s White Spot restaurants and Costco, do better at the expense of those using a low-wage strategy, such as Tim Hortons or Walmart.

But at the heart of the increase is the political issue of social fairness, says Carleton University professor emeritus Allan Moscovitch, who says the minimum wage was initially intended to provide enough income to support a family.

That has slipped over the years so that working families who try to survive on a single minimum wage live in poverty.
U.S. fast food workers have been demonstrating for a $15-an-hour nationwide minimum wage, which would be nearly $19 Cdn. (Jim Young/Reuters)

Guided by the tradition of British poor laws, he says, social service payments are always held below minimum wage. That means sharply higher minimum wages may eventually result in welfare payments closer to the poverty line.

As Ontario Premier Kathleen Wynne said last week, businesses never think it is a good time to raise the minimum wage.

"Ontario is doing very, very well right now. Corporate profits are high," Wynne told the CBC News. "And so it just makes no sense that this is not the time."

"It is the time," she said.

Time for an election

Moscovitch archly points out that it is also the time for Wynne and her Liberal Party to move left and take votes from the New Democratic Party in the provincial election scheduled for June. But that political motivation may create a rare window to do something governments have been avoiding.

It is true that studies around the 2008 economic slump in the U.S. have shown that the success or failure of a change in minimum wage depends on the conditions of the wider economy.  

On Friday Canadian job creation hit another high and unemployment hit another low. Perhaps this time the real-life experiment will work out.

Whatever the result, it may settle some economic arguments. More likely, it will spark a new round of arguments over whether the Canadian economy would have been better or worse off if the changes had never happened.

Follow Don on Twitter @don_pittis

More analysis from Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.