taxreqLast May, the Ontario government announced plans to increase the minimum wage from $11.40 per hour to $14.00 per hour on January 1, 2018, and $15.00 per hour on January 1, 2019, followed by annual increases at the rate of inflation.
I have been following with great interest the discussions and reactions to the impact of the wage increase from the different stakeholders. The Ontario government’s goal with the minimum wage increase was to create better jobs, fair workplaces, and equal pay for workers, but is this going to work?
While the minimum wage increase has been welcomed by many workers, there has been some backlash, in particular from businesses. Their argument is that some businesses are already working with razor thin margins, and a wage increase of this sort will leave them no choice but to eliminate jobs in order to stay afloat. This could further hurt vulnerable workers as they are faced with job loss and have to resort to public assistance. To put it into perspective, a full time hourly employee works 40 hours a week (or 2080 hours a year). If they are making minimum wage, their annual wages went up about $5,400 in January 2018 from what they were making in 2017 (or a 22.8% increase), and a further $2,080 increase to come in January 2019. For the businesses and employers, this is quite a significant increase and they have to find ways to offset these costs. It is not practical for businesses to raise prices at the same rates as the minimum wages increase.
There is a perception that with minimum wage increases, lower earning workers will have more disposable income that will encourage them to spend more resulting in a boost to the economy. While this may happen in the short term, I find that businesses are forced to increase prices to maintain their margins. These costs are invariably transferred to the consumers, which includes those earning minimum wages. So the wage increase ends up being offset by increase in consumer prices, and end up putting the workers in the same, if not worse, position than before, and as a result, the real minimum wage has not actually changed.
I agree with the Ontario government and the general public that the minimum wage adjustment is needed. However, drastic increases like the one for 2018 and 2019 need to be evaluated carefully. History shows that the minimum wage has not necessarily kept up to pace with the increase in consumer prices. Minimum wages tend to remain relatively flat for many years, and then increase in leaps and bounds, whereas inflation rates tend to maintain annual steady increases. That makes it difficult for workers to keep up with the cost of living on a year to year basis because that one-time adjustment every couple of years does not compensate for the losses from other years when minimum wages remained flat while inflation increased. It does not mean either that they can save that increase received in 2018 or 2019 for future years when minimum wage again remains flat. That is why the Ontario government’s proposal to have annual increases at the rate of inflation makes great sense because both businesses and workers can adjust at the same pace as the economy.
The consumer price index (CPI) is used to measure the changes in cost of basic goods and services needed by households for living. Using the consumer price index to compare how the minimum wage has performed over the years, we can see the disparity. For the province of Ontario, the consumer price index showed a 1.9% increase from November 2016 to November 2017 compared to a 1.75% minimum wage increase during the same period (minimum wage increased from $11.40 to $11.60 per hour in October 2017). Special attention has to be given to the fact that this minimum wage increase only happened in October 2017, which means that for the most part of the year, the minimum wage earners lost 0.15 cents for every dollar they earned when they purchased basic goods.
Over a 5 year period from 2012 to 2016, the consumer price index increased by 7.9% in Ontario, whereas the minimum wage remained flat for 2012 and 2013, then increased sharply in 2014, and then smaller increases in 2015 and 2016. In 2018, we have a significant increase of about 23% compared to prior year.
When we look at the inflation rate percentage (%) change for food and shelter, and compare it to the rate that minimum wage has increased over the period, we can see that there has been significant disadvantage to minimum wage earners, in particular for 2012 and 2013 where minimum wages did not change, but basic living costs increased.
While the January 2018 increase to minimum wage comes as a welcome relief to many workers, I would like to think that the real issues cannot be solved by sudden wage increases. The Ontario government’s concern was that many employees were working long hours but still struggling to support their families at the then wage rate of $11.40 per hour. However, we are already hearing of some employers starting to cut benefits in order to mitigate the costs from the wage increases. There are also reports of daycare costs increasing over the new minimum wage. These type of reactions impact negatively on what the government was hoping to achieve for the workers.
Statistics Canada released a report in 2014 that had some interesting facts:
- Between 1997 and 2013, the proportion of employees paid at minimum wage increased from 5.0% to 6.7%. The bulk of this increase occurred between 2003 and 2010.
- When the minimum wage is revised upward, the proportion of employees paid at minimum wage may increase. This is because some employees whose wage was previously above the old level are paid the new rate, and join those who were already earning the minimum wage.
- The profile of minimum wage workers did not change between 1997 and 2013, as young workers, less-educated workers and workers in the service sectors were still more likely to be paid the minimum wage.[1]
Conclusion
In my opinion, I believe that the discussion regarding families and households not being able to afford basic goods and services should move beyond just the minimum wage. There are obviously some social issues that need to be addressed to bring workers out of minimum wage. This could include providing workers opportunities to upgrade their skills. However, I still agree that minimum wages need to be increased, but perhaps at a regular steady rate each year that would allow both businesses and employees to manage without dramatic hikes like the recent one.
[1] Galarneau, Diane and Fecteau, Eric. “Insights on Canadian Society. The ups and downs of minimum wage.” Statistics Canada. July 2014.
