There are plenty of factors for employers to consider when setting wages — attracting top talent, profitability and retention perhaps chief among them.
But another consideration has emerged in recent years: Public pressure for corporations, particularly those in the services sector, to pay higher wages.
WalMart recently raised its entry-level wage to US$9 an hour in the United States — a move that will cost about US$1 billion, according to Reuters. McDonald’s also announced it would raise its minimum by US$1 above the locally mandated minimum wage at all U.S. stores it operates directly.
On this side of the border, nearly every province has seen a minimum wage increase in the past year — with the exception of British Columbia, said Nicole Troster, director of provincial affairs for Ontario at the Canadian Federation of Independent Business in Toronto. Ontario will raise its minimum wage to $11.25 in October — the second-highest wage in the country, after the Northwest Territories’ $12.50.
“It basically puts pressure on governments to raise minimum wage because nobody wants to have the lowest minimum wage,” she said.
Combined with the public pressure to increase minimum wages is the issue’s political allure, said Morley Gunderson, a professor at the University of Toronto.
“It is a politically appealing thing,” he said. “That’s what gets attention and that’s what hooks people — and the protests and the signs are there.”
Helpful or hurtful?
But how useful is a higher wage to workers — and does it carry adverse employment impacts such as lost jobs?
“The bottom line is it really is a controversial issue,” said Gunderson. “The studies that have been done are done by good people, and in the U.S., at least, some tend to find no impact; others find a pretty substantial impact.”
There have been studies done by top-rate labour economists that have found no adverse employment impacts from a higher minimum wage, he said.
“On the other side, there’s a fair number (of studies) done by very good people finding pretty substantial impacts or at least a moderate impact.”
Studying the pros and cons is difficult because there are so many different factors at work that are tough to control for, according to Michal Rozworski, a Vancouver-based economist.
“There’s lots of other factors that could be confounding your data. There could be worse economic conditions (in one place), there could be a different mix of minimum wage jobs that wouldn’t impact one place as much as another, et cetera.”
Some fairly recent research in the U.S. tried to factor those issues out by looking at neighbouring counties across state lines, he said.
“So places that are basically as similar as possible — a couple of kilometres apart with a similar industrial basis and populations and all of that, but they’re in two different states in the U.S.,” he said.
“Looking at thousands of these pairs, they basically found zero effect on jobs after raising the minimum wage.
“The Canadian studies that exist so far, a lot of them find that there is an effect on jobs. But I think there’s good reason to believe that it’s a similar problem to the older U.S. studies where the methodology just really isn’t fined-tuned enough to really pick out what the impact is of an actual minimum wage change.”
Gunderson agreed that in Canada, there is more of a consensus in the research that minimum wage increases come with adverse employment effects. But it’s possible the studies tend toward that result because the Canadian data is better-equipped to detect the effects of minimum wage changes, he said.
That’s because in Canada, the wages are set at a provincial level and have varied quite a bit over time.
“So you’ve got a lot of changes from which to identify an impact,” he said.
“There’s five or six studies that have been done in Canada using different data sets and different methodologies, so they’re not just updating a single data set or single methodology.”
Three of those studies were done by Gunderson himself, along with colleagues.
“We’re all finding pretty substantial adverse employment effects for youth, in the neighbourhood of a 10 per cent increase in minimum wage giving rise to a three to six per cent reduction in the employment of youths. And that’s not humongous but it’s not inconsequential... especially when you consider that young people now are having more difficulty finding jobs,” said Gunderson.
Once a minimum wage increase is put in place, there will naturally be an adjustment period. Rozworski postulates that adjustment period will be a positive one, with employers seeing lower turnover and greater employee satisfaction.
“People aren’t working for poverty wages so they’re more likely to stick around. You have companies more willing to invest in productivity because they’re paying their workers more, so they do want to get more out of them,” he said.
“You can actually also see better wage compression, so you actually see the top wages actually potentially going down a little bit. In the workplaces where there’s higher minimum wages… they’ll tend to pay lower wages (on the higher end).”
Many business groups take a different view of the adjustment process, predicting layoffs and lost jobs if employers can’t cope with cost increases, said Troster.
“When there are minimum wage increases, businesses are basically forced to cut hours or positions altogether in order to cope with the increased costs. So minimum wage policies actually end up hurting the very people that they’re supposed to help,” she said.
But Gunderson said it’s unlikely that most of the impacts come about it such an obvious or straightforward way.
“People look at this and say, ‘Well, I can’t imagine an employer laying off a young worker because their wage went from $9 an hour to $10 an hour.’ But that’s not the adjustment process. The adjustment process is if you’ve got a lot of minimum wage workers, you may do things like the next time you have an opportunity to install some equipment, instead of hiring more workers, you do it; if you’re running a car wash, instead of having five people outside you install equipment that works faster; at a restaurant, instead of having waiters and waitresses all the time, you have some cafeteria type thing… it’s those slow, subtle adjustments,” he said.
“And one of the things that we found… was that the impact of minimum wage increases in Canada tended to fall on what we labelled as permanent minimum wage workers, as opposed to temporary minimum wage workers.
“In other words, you’ll have a lot of people who are students or young people who are at a job for a short period of time, a summer, whatever, and it doesn’t matter to them. They’re on the minimum wage for a very short period of time and they didn’t have any adverse employment impact.”
But it’s the people who work for minimum wage over the long term who bear the disproportionate brunt of the adverse employment effects of wage increases, he said.
“Those are the people that tend to be adversely effected.”
The sky doesn’t fall in because of minimum wage increases but it probably has an adverse effect on the employment opportunities of young people, and we have to worry about that, said Gunderson.
“At best, it’s an exceedingly blunt instrument for dealing with poverty and, at worst, it could exacerbate poverty. It just is not a good tool for dealing with poverty in part because of the adverse employment effect. A minimum wage increase is not going to knock a person out of poverty or deal with it that much,” he said.
“It’s not the most disastrous policy in the world but I don’t think it makes good economics.”
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