Ontario Sets Minimum Wage Then Subsidizes It

David Dubinsky attends the minimum wage hearings in April 1955.

The minimum wage is an absurd economic policy. It is marketed to the voting public as a method to increase prosperity and improve the standard of living. Instead, it has the opposite effect.

Consider this: through a simple proclamation, the government arbitrarily dictates the lowest rate of pay that any employee may earn. It then becomes illegal to hire an employee for less than the prescribed minimum rate of pay – even if he or she would voluntarily work for less. In order to meaningfully impact prevailing wage rates, the minimum wage must be set above that rate of pay which would be determined on an unhampered labour market. By virtue of this observed increase in wage rates for some, the policy is deemed successful.

But is it?

No. If increases in the minimum wage by unilateral state decree increased prosperity, legislators could further improve living conditions by mandating an hourly rate of no less than $100 an hour. Or better still: $1000 an hour. Clearly, such a policy would render a great deal of labour unprofitable. Consequently, employers must economize to offset the higher priced labour. Unemployment would ensue. Productive workers who formerly delivered a return on investment for their services would be squeezed out of the workforce. Also, unobserved potential jobs below the legal wage floor are prevented from coming into existence.

“Governments would not be so stupid as to set the minimum wage so high,” one might respond. “They will subscribe to the Goldilocks principle: it will be set ‘just right.'” Unfortunately, the economic consequences of minimum wage laws are the same whether the rate is set at $100 an hour or $10.25 an hour.

A friend of mine recently traveled to Thunder Bay to celebrate his father’s 65th birthday. Before he retired a few years ago, his dad worked as a mechanic. Like many others from his generation, he got his start pumping gas and washing windshields at his neighbourhood garage. It didn’t pay much. It was a start. When business was slow, the mechanics would teach him about transmissions and engines and other things about which mechanics know. As a result, he discovered his career. The on the job experience gained between trips back and forth to the pumps served as his apprenticeship. He developed the necessary skills and became a well-paid tradesman. His story is common among his generation.

Sadly, similar opportunities are few and far between today. It is more cost-effective to utilize pay-at-the-pump technology than to hire a smiling acne-prone kid to pump your gas, wash your windshield and check your oil. These kids are less likely to find successful careers as skilled tradesmen. Instead, they get bachelor of arts degrees and then serve coffee at Starbucks. In addition, owners of movie theatres can no longer afford to hire ushers to escort you to the nearest vacant seat. Grocery store owners now have their cashiers bag your groceries. Expect to wait longer in line because of this. Don’t expect someone to offer to carry your bags outside and load them into your car. Not so long ago, these jobs were commonplace. Make no mistake about it: this is commensurate to a decrease in the standard of living. And minimum wage laws are to blame.

Consumers are harmed by minimum wage laws in other ways, too. In some cases, the increase in labour costs is passed on to the consumer via higher prices. If this is not possible – if, for example, consumers refuse to pay higher prices for a good or service or the government has implemented price controls – marginal producers may be driven out of business, resulting in decreased production and shortages.

Interestingly, it seems that the problem of unemployment (particularly among low-skilled youth) has not gone unnoticed by the Ontario provincial government. It recently came to my attention that they are attempting to tackle student unemployment through the aptly-named “Summer Jobs Service” program. Implemented here by the Ministry of Northern Development and Mines, it consists of the following subsidy:

The Summer Jobs Service is provided by the Ministry of Training, Colleges  and Universities; it is delivered in Northern Ontario by MNDM.

For employers who hire summer students, the program provides a $2 per  hour incentive, up to a maximum of $1,120 per position.

Imagine that. Minimum wage laws have wrecked the student job market and created rampant youth unemployment. Instead of repealing this harmful legislation, the government of Ontario will incentivize employers to hire students by subsidizing their wages. At taxpayer expense. Make no wonder Dalton McGuinty is projecting a $15.2 billion provincial deficit in 2012.

Minimum wage laws rest on the fallacious notion that a handful of central planners meeting in a comfortable boardroom somewhere know that wage floors should exist and at what rate. Dr. Gary North describes it this way: “badges and guns (are deemed) more trustworthy than competitive bidding by individuals for the use of scarce resources.”

It is nonsense. It should be recognized as such.

  • William Gillies

    A few things about your argument:

    “Like many others from his generation, he got his start pumping gas […] and became a well-paid tradesman.”

    I don’t think you can draw the conclusion about the minimum wage you are from this anecdote. I would tend to agree with you that such a story was more common a generation ago, but is this attributable to the minimum wage or a shift in the nature of global economy?

    A generation ago, the decent jobs were mostly manufacturing, something that paid well above minimum wage, but they’ve been moving overseas. Is this attributable to minimum wage, or perhaps the advent of containerization? Are self-serve gas pumps really a response the minimum wage or simply a new technology that’s cheaper to operate than any market determined minimum wage? Is the end of grocery bagging and carry out more to do with the rise of big box grocery stores seeking efficiencies to maximize profit? Smaller independent grocery stores still offer this service (like the Port Hood Co-op). I think the story of ushers would be much the same as grocery carry out since the birth of the megaplex.

    I don’t think you can draw such neat conclusions about the impact of the minimum wage, and your argument reads more like a Just So story (I also suspect that Ontario’s minimum wage predates the subject of your story’s entry into the workforce). I think it’s a dubious assertion that no minimum wage will lead to increased prosperity for all. I’m not saying this as a defense of minimum wage law, but rather that lower wages are not higher wages. The minimum wage isn’t even really a living wage, and if the market determined wage floor lies somewhere below the mandated minimum, that’s what businesses are going to pay, and individual employees don’t really have a lot of choice about it, unskilled or an English degree.

    Profits come entirely out of the surplus value that owners can extract out of their employees, so it makes perfect sense to pay as little as possible for labour in order to maximize profits. Since every business is doing this for themselves, it drives down collective wages. The only counter to this downward pressure is not minimum wage legislation as you rightly point out, it’s employees banding together to ensure that it is not just employers setting the price of labour (Germany has no minimum wage legislation for example). It was strong trade unions (which Germany also has) that drove average wages up by negotiating and sometimes forcing employers to share more of their profits with workers.

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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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