Watch Me Fight 40 Economists

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The Liberal government of Ontario is intending to raise the minimum wage to $15 an hour by 2019, and 40 economists have penned an open letter to back this plan, and I couldn’t disagree more.

Obviously I’m no economist and having recently finished Tom Nichols book “The Death of Expertise” I approach this subject with some trepidation. But while I may not be an expert, public policy deserves to be reviewed, debated, and questioned by the public.

The nature of the debate follows predictable patterns. On one side, enthusiasts for the hike in the minimum wage believe that this will be an important financial boon to lower income families. Sadly far more people today subsist off of minimum wage than we might guess, and raising families on such an income is really little more than wage slavery and a sentence of poverty, problems that have serious consequences for the society at large. They also cite the benefits of boosting aggregate demand for spurring economic growth that can result from a wage hike.

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Opponents argue that this will put off hiring, increase prices on goods and usher in more automation. These are also valid and well founded criticisms that deserve to be seriously addressed since they represent problems that are hard to unwind one you’ve got them.

The first issue that those of on the sidelines might ask is “what is the right minimum wage?” Surprisingly that question seems to lack any definitive answer.  A quick review of the history of minimum wage tells us that neither do governments. This is partly because the minimum wage was initially established to fight substandard wages but has grown into an attempt to build “living wages”, stamp out sweat shops, provide a minimum cost for labour while still protecting businesses and growing the economy.

To accomplish those various tasks, minimum wages are really the response to lots of different inputs and therefore don’t yield correct or exact solutions. The perfect example of this has been the minimum wage experiments in cities like Seattle. Last year Seattle raised its minimum wage to $13 an hour, a substantial jump over its previous rate of $7.25. Analysis of this move has showed that people earned more per hour, but fewer hours were worked resulting in an average decline of $125.

This mixed blessing is at the heart of big jumps in the minimum wage. Attempts to make things better frequently have unexpected and unpredictable consequences, and this is largely because trying to tackle poverty through the exclusive use of adjusting the minimum wage only addresses one factor in many that contribute to debilitating wealth inequality.

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I had previously written that “The Robot Revolution Will Cost $15 an Hour” and highlighted the arrival of McDonald’s new “digital kiosks” were part of that robot revolution. Across other low income work we see similar moves into greater automation, from airport ckeck-ins to Walmart E-Commerce towers and even Amazon’s recent purchase of Whole Foods. Raising the minimum wage provides the kind of creeping costs in personnel that improve the cost benefit analysis of big capital expenditures into new technology that will, in the long term reduce payrolls.

The flip side of the coin is that smaller companies that don’t have big financial resources tend to be stuck with higher costs for staff on-top of other overhead costs that may not be under their control. If that seems like an unfair hypothetical simply stop by a neighbourhood store and ask them how they find the cost of street front rental over the last few years. I promise your local grocer or bookstore seller hasn’t been able to raise prices faster than the growth in their rent.

For me the crux of this issue comes down to an old rule of thumb for budgeting: 50-20-30. If you don’t know it, it goes like this. 50% of your income should go towards essentials, including housing, food and transportation. 20% should go to savings, and 30% is discretionary. That sounds like great advice. Now check out this 2015 report from TD bank about how average renters in Toronto are paying 50% of their income just for the rent.

The story for Toronto is all about housing. Toronto is a successful growing city, but one that continues to play catch-up for its infrastructure and housing needs. The lowest incomes can be raised but the likelihood is that it won’t address the problems that continue to make many citizens struggle under the weight of burdensome costs just for living in the city. From the middle class to the working class high debt rates and expensive homes are gobbling up the economic prosperity of Canadians, and that deserves consideration before we charge blindly into making matters worse by hitting the minimum wage with steroids.

But what do I know. I’m not 40 economists.

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