During the recent Alberta provincial election, Rachel Notley, its current premier, promised to increase minimum wage over the next few years.
Fast forward one year and Kathleen Wynne, current premier of Ontario, has promised the same course of action. In Ontario, the minimum wage will jump from $11.60 per hour to $14 per hour in January 2018, then to $15 per hour in 2019. Minimum wage acts as a price floor in the labour market, where employers can only legally provide wages at or above minimum wage.
Without a doubt, the change in wages would have multiple effects.
Initially, the labour market would not be able to adjust to the new equilibrium. The new set price floor would be above the equilibrium price at the former minimum wage price. Firms would be inclined to cut quantities of workers. However more workers would want to work at the new wage. This would create a surplus – the amount of an asset or resource that exceeds the amount used – of workers within the labour market.
In the short-run, the amount of workers will decline, as firms will rationally lay off workers to keep costs down. In the long-run, firms may increase the prices of their goods and services, allowing them to hire more workers.
“Without a doubt, the change in wages would have multiple effects.”
This increase in price may also lead to inflation – a sustained increase in the general level of prices for goods and services. This could also hurt consumers and potentially negate the purpose of an increase in minimum wage.
In attempts to meet the market equilibrium, the firms and companies may be tempted to look into replacements for workers, such as moving productions abroad in locations where minimum wage is lower. They may also turn to automated methods of production, such as 3D printing and a robotic workforce.
As technology develops, the costs of alternatives for the workforce become more affordable. These technologies may one day replace the workforce itself. This would hurt workers in affected industries, but may lead the way to cheaper, long-run production costs and increased efficiency.
Government spending may increase as a result of the provision of welfare and social assistance programs. Jobs may be lost to technology or cutbacks, leaving many needing social services, putting a burden on taxpayers.
The implemented minimum wage can increase the risk of black markets, an economic activity that occurs without government-sanctioned channels. This causes the falsification of government records and effects the tax payers leading to less money to fund basic services, such as education and health.
Certain businesses, such as customer service, will not be largely impacted by the implementation of a $15 minimum wage. They can adjust to higher labour cost at a faster pace than other businesses.
“As technology develops, the costs of alternatives for the workforce become more affordable. These technologies may one day replace the workforce itself.”
A slow increase over several years gives time for firms to plan for the wage increase. This minimizes the abrupt effects of layoffs, as workers are given time to look for alternative industries to work in. They then minimize the loss of production, while firms are able to research more affordable alternatives for workers within a timeframe before layoffs begin.
Implementing a new minimum wage may not seem like it would have a huge negative impact. There will always be unfavourable aspects in the market, like black markets and surpluses. The provincial government’s goal is to provide primarily for low-income workers, through the new labour cost. While having firms satisfied that their quantity demanded has met the market equilibrium, that goal will be met.
By Sherouk Elasfar
Please note that opinions expressed are the author’s own. They do not necessarily reflect the views and values of The Blank Page.