After scrapping the plan three years ago, Ontario Premier, Doug Ford, has decided to raise the minimum wage to $15/hour. Naturally, this move has sparked a fair amount of discussion around what the minimum wage level ought to be. Instead of taking a moment to realize the flaws in the minimum wage system, people are doubling down, calling for it to be even higher. 6ixbuzz, a Toronto news website, recently discussed how different regions in Ontario have separate costs of living, which should surprise no one. In this article, they cite a breakdown by The Ontario Living Wage Network on the “living wage” needed for people to live all over Ontario. Unsurprisingly, Toronto has the highest at $22.08/hour. This study effectively lays out the flaws in a minimum wage policy while miraculously coming to the wrong conclusions.
The first issue is the assumption that a “living wage” exists and that a government can set this wage. Many others have covered this concept before, so I’ll be brief. The “living wage” idea stems from the concept of the “price level,” which measures the average prices in the economy. There are plenty of attempts to calculate the price level using market baskets and similar metrics; however, they all fall victim to The Knowledge Problem. The “living wage” aims to cover the cost of living in the province at a given price level. Since each individual has their own unique wants and needs, it is impossible to set a wage at such a rate to satisfy every person in the economy. Further, the study cited above demonstrates the critical flaw in having the province legislate the “living wage,” as every municipality has a different cost of living, mainly to do with housing.
The next problem comes from the enemy of all humans, time. When we look at the study from The Ontario Living Wage Network, we see a snapshot of the economies today. What about tomorrow? What about next year? Inflation is currently 4.3% in Canada, and thanks to economist Richard Cantillion, we know that it impacts every part of the economy differently. What is the longevity of this wage with the rising costs of living, and if expenses suddenly fall, are we to expect the state to set the wage rate lower? I’m sure the Ford Government would win big political points for that. Realistically, we cannot expect the mechanisms of bureaucracy to keep up with the economy; even the staunchest of minimum wage supporters have to agree with that.
Further still, what happens when the “living wage” takes effect? The surge in demand for all the necessities calculated into the “living wage” will drive up prices or create massive shortages if prices don’t act fast enough. When those prices go up, the whole basis of the “living wage” is flipped on its head as we lower more people into poverty than before the policy came into effect. These price changes compound with the rise in the cost of doing business as labour becomes more expensive. This, and the other problems listed above don’t paint a flattering picture for the minimum “living wage” argument.
On the other hand, with free-floating prices for wages—and everything else—in each municipality, individuals have more ability to relocate to areas that better fit their wage rate. Moreover, when the market sets the price of labour, workers actually gain more power because if the workers cannot afford to live near their jobs due to low wages, the companies will run out of workers. Geographical arbitrage is the single most effective tool to increase wages.
Reducing taxes and the legislative red tape can also help get more businesses started, lowering costs with the competition.
Lastly, removing the price floor on wages removes the legal excuse to keep wages low. As counter-intuitive as it may seem, having a minimum wage disincentivizes wage growth by allowing companies to use it as a precedent for paying the same price for all entry-level positions. To look at this from the other side, if all businesses in Ontario came together and declared that they would all pay a specific wage for an entry-level position, labour advocates would cry foul, calling it price-fixing cartel behaviour. If monopolistic price setting is wrong when corporations do it, why on earth do labour advocates believe that it’s any different when the state sets the wage? You can put a cow in a tracksuit, but it’s still a cow; you wouldn’t expect it to beat Andre de Grasse in the 200m sprint.
The Ontario Liberals and the New Democratic Party (NDP) are correct; Ford’s move to raise the minimum wage is nothing but a play to win votes. However, they go wrong when they believe the minimum wage must equal their mythical “living wage.” How about we let competition and sound economics create wage rates tailored to each region and sector. The advocacy for intervention can only backfire, as demonstrated above. Fighting against the living wage is political suicide, so don’t expect a change of heart in any political leaders. As I’ve said before, you can’t expect politicians to sacrifice their votes in favour of a real solution.
