Ontario’s plan to increase the province’s minimum wage to $15 an hour by 2019 is a weak weapon in the war on poverty, and could ultimately cause a net loss of 50,000 jobs, an independent analysis of the policy has found.
The Financial Accountability Office of Ontario on Tuesday released a commentary covering the province’s proposal to increase the minimum wage, finding the added labour costs for businesses will increase workers’ incomes, but that those extra payroll costs will force firms to axe some lower-income positions.
The watchdog estimated that the wage hike will reduce total employment in the province by about 0.7 per cent, or a net total of 50,000 jobs, as businesses try to shrink their costs through automation or price increases that could lead to reduced sales and cause layoffs.
“However, there is evidence to suggest that the job losses could be larger than the FAO’s estimate,” the FAO said. “Ontario’s proposed minimum wage increase is both larger and more rapid than past experience, providing businesses with a greater incentive to reduce costs more aggressively.”
After conducting its analysis, the FAO — an independent officer of the Ontario legislature that examines its finances and policies — concluded that “higher minimum wages are not an effective way to alleviate poverty,” as just 27 per cent of the gain in labour income would flow to low-income families. Instead, households above the low-income cutoff would reap most of the benefits, the watchdog found.
“As a result, the income gains from Ontario’s proposed minimum wage increase would be relatively broadly distributed across all households and not concentrated on low-income families,” the FAO wrote. “Since minimum wages target low-wage workers, but not necessarily low-income families, raising the minimum wage would be an inefficient policy tool for reducing overall poverty.”
Ontario’s Liberal government says the province’s strong economic growth is allowing them to increase the minimum wage and usher in a host of employment and labour law reforms, such as ensuring paid sick days for workers. The government also cited economic studies touting the benefits of higher wages.
“We don’t believe that anyone in Ontario who works full time should be struggling to pay their rent, put food on their tables or care for their families – especially when the provincial economy is doing so well,” said provincial Labour Minister Kevin Flynn in a statement. “The moral and economic evidence supporting this fundamental belief is without question. We will not back down from this commitment.”
But the analysis comes as businesses in Ontario and Alberta — where a $15 minimum wage is slated to go into effect next year — are bracing for the added payroll expenses, which they have warned could cause job losses.
“Significant 2018 minimum wage increases planned for Ontario (~21% y/y) and Alberta (~11% y/y) have worried investors, given the uncertainty around how the grocers will offset these headwinds,” said a Monday note from National Bank Financial on Empire Co. Ltd., which owns the Sobeys grocery brand an employs many minimum wage workers. “Historical data suggests that the industry will mitigate the impact of higher wage rates largely through higher prices, but also through labour adjustments.”
The FAO estimated that about seven per cent of the province’s work force is earning Ontario’s current minimum wage, or approximately 520,000 people. The current $11.40 wage is set to rise to $11.60 an hour on October 1, then shoot up to $14 in January and $15 the year after, a move that would raise the incomes of about 1.6 million workers in the province, or 22 per cent of its workforce, the watchdog predicted.
But the bump in Ontario’s minimum wage, planned by Liberal Premier Kathleen Wynne’s government, would also shift the demographics of the workers earning that pay, the FAO said. Whereas approximately 60 per cent of current minimum wage workers are teens and young adults, a $15 wage would see adults account for 56 per cent of minimum wage workers, it said. As well, most of the anticipated job losses would be borne by younger workers, the FAO found.
The watchdog projected that the increase in the minimum wage would hike total labour income by about two per cent, but nudge businesses to raise their prices in order to pay for the rising labour costs. It would also increase the percentage of full-time workers who earn the minimum wage.
“However, a higher minimum wage would also raise labour income and increase consumer spending,” said the FAO. “Higher spending would then stimulate economic activity and lead to job creation.”
The jobs created from greater household spending could offset some of the minimum wage-related job losses, the watchdog said.
“The challenges of adjusting to the higher minimum wage would be more pronounced for firms which rely heavily on minimum wage workers and face highly competitive business environments,” added the FAO. “For example, businesses in the agriculture and retail trade sectors could face difficulty increasing prices due to competition from international imports and online retailers. In addition, smaller employers may have less flexibility than larger businesses to reduce costs.”