Maximizing The Minimum – Finding the Sweet Spot for Minimum Wage is no Easy Feat

By Angus Gillespie

If you were to survey 10 business people and economists about minimum wage and how quickly it should accelerate and to what level it should attain, you’re quite likely to get 10 differing opinions. On the one hand it’s a noble idea to pay people more for the work they do. However, how much more can businesses absorb before they begin making staffing cuts in order to remain afloat and how many of these enterprises would be affected. Is it 5%? 10%? 30%? 50%? The truth is, nobody knows and therein is the fear. Alberta’s sputtering economy and Ontario’s jarring increase to the minimum wage as of Jan. 1, 2018 has resulted in copious amount of talk and concern about what it will do to the collective workforces of two substantive provinces that have traditionally been leaders in supporting the national economy.

Alberta and Ontario Forging Ahead

In Ontario, Premier Kathleen Wynne has been under fire from a number of industry leaders and entrepreneurs who have expressed grave concern about how rapidly the rate will jump. Now at $11.40 per hour, it will increase to $14 on January 1, 2018 and then go up by another dollar to $15 as of Jan. 1, 2019. Originally, the plan was for an increase of a modest 20 cents to $11.60. Alberta’s rate will jump from $12.20 per hour to $13.60 as of this October and will reach $15 by October, 2018.

Certain segments of the workforce are expected to be harder hit than others. Perhaps there is no greater concern than those in the hospitality industry, including restauranteurs. Just days prior to publication Premier Wynne hinted that her government may be working on a plan that would help alleviate the consternation surrounding labour laws and the anticipated increases.

“We want to be fair to businesses and, as well, to employees,” says Wynne. “Restaurant owners, in particular, have talked to me about other fees that they pay; other things that come off their off their payroll cheques.”

However, as of now, the promise to help has done little to allay fears amongst those who stand to lose the most primarily because the promise itself remains extremely vague. It doesn’t instill confidence in the workforce when the leadership admits to not fully understanding what those measures will be.

“We don’t know exactly what those will be, but there are a number of suggestions that are coming forward. We’re looking at everything, because, as I say, I want us to find this balance.” continues the Premier.

It would seem that the most vulnerable to the prospective increase are the very people who may find their jobs in jeopardy. Loblaw Companies Ltd., which owns Shoppers Drug Mart and grocery chains including Loblaws and No Frills, estimates the wage hikes will mean its labour costs will grow by about $190-million next year.

“We are flagging a significant set of financial headwinds and the organization is mobilizing all of its resources to see whether or not it can close that gap,” says Loblaw chairman and CEO Galen G. Weston.

Canada’s largest grocery and drug store operator is warning that minimum wage increases in Ontario and Alberta threaten to harm its bottom line and it will have to find ways to cut costs. Reading between the lines it means one of two things – or perhaps both: higher prices and/or employee layoffs.

Wynne’s Ontario government is working on the notion that the wage increases will increase people’s purchasing power and stimulate the economy, assuming of course the majority of those individuals still have their jobs after the fact. Several noteworthy business groups, including the Ontario Chamber of Commerce and the Canadian Federation of Independent Grocers, have indicated that this move is likely going to result in job losses.

From the other side, Ontario Labour Minister Kevin Flynn uses the example of Loblaw as a success story and that profits have been strong, while questioning whether everyone within the company has been properly provided for in the sharing of the benefits.

Flynn says many workers in a variety of sectors are feeling the pinch and can barely makes ends-meat to survive. Few would argue that point, but recklessly bumping up minimum wage by such a wide margin in such a small time-frame has many business analysts and economists worried.

In 2015, Rachel Notley’s ruling Alberta NDP party announced plans to hike its minimum wage from $10.20 an hour to $15 an hour by next year.

Weston calls the wage increases “the most significant in recent memory.” In anticipation of the large spike in payroll the company has already begun taking measures to save money, including rolling out more self-checkouts at its Shoppers Drug Mart stores. Unless moved to other responsibilities within the stores it almost assuredly means less cashiers will be required to service customers.

Alberta Labour Minister Christina Gray says it’s critical to pay lower-end earners a fair wage, adding the money will be re-invested into the economy.

“We are committed to supporting to our low-wage Albertans, people who are working full-time jobs and are still not able to make ends meet,” she says.

A One-tier System

Alberta is also making changes to the minimum wage paid to servers, bartenders and others whose main job is to dispense liquor. Those workers have traditionally been paid $1 an hour less than minimum wage to compensate for what was accepted to be more money in tips. As of October, the gap will be gone completely and liquor servers will receive the same minimum wage as everyone else.

Gray says the gap needed to be closed because there had been too much variance in tips for liquor servers to make it reliable.

Business and industry groups and opposition critics have been urging Premier Notley and her government to rethink the hike or at least further investigate the implications on the economy before introducing such a large spike all at once. They say the wage hikes are too much too fast and threaten to further cripple businesses still reeling from the protracted slump in oil prices.

Doug Porter, Chief Economist and Managing Director, BMO Financial Group, says the minimum wage increase stands to impact small businesses the most – those companies that have 50 or fewer employees and will find it harder to absorb the financial impact.

“I’m not brushing this off as something that can readily and easily be absorbed. It is small business that I am most concerned about,” he tells us.

The one issue besides how forcefully the minimum wage is being implemented in less than a year is the broader landscape in that there are a number of other measures that are already negatively impacting small businesses – and businesses in general – such things as businesses’ need to bump-up their Canada Pension Plan (CPP) contributions and higher electricity costs, despite some temporary reprieve with the latter. However, the money being saved now is merely being kicked down the road to be dealt with at a more convenient time, although nobody seems to know when that will be.

There are a number of cost pressures that are coming down seemingly all at once for business owners and this just adds to the burden. As the old saying goes there is a straw that will eventually break the camel’s back – and some are wondering if these large-scale increases in the minimum wage over such a short period of time will be what puts some enterprises over the edge.

Take for example a restauranteur that is already running with the minimum staff without otherwise negatively impacting on customer service. It seems the options are limited in terms of recouping the additional revenue needed to be able to meet the new, significantly higher payroll. Is the only real option to increase prices on the menu?

“This is going to lead to higher prices across the board,” opines Porter. “Some would argue maybe that’s as it should be. If you are talking about services that are largely aimed at domestic consumption then you can make the argument that it’s not that big of a competitiveness issue because everybody is going to be in the same boat.”

The percentage of the market share may not change for companies, but the size of the actual pie itself could well get smaller, with more consumers deciding that eating out is just too expensive. The bottom line is it could result in less spending.

“The reality is that most people are very price conscious in Canada and many are running close to the edge in terms of their budgeting. If faced with higher prices they will have to find ways to economize,” says Porter.

Porter says he’s all for seeing wages rise in an effort to make people’s lives easier but imposing such measures from above isn’t necessarily the best decision.

“Obviously the government implements the change, but you don’t want to force-feed it and cause unintended problems, which is what I am concerned about with it being such an abrupt move. The very people that this measure is meant to help it could actually hurt them,” he notes.

While the increase in Ontario is getting a lot of attention in the central and eastern part of Canada, out west all the talk is about Alberta’s increase, which may in fact be the bigger concern given Alberta’s sputtering economy and a higher than usual unemployment rate.

“If this had been brought in four years ago when the Alberta economy was booming and labour shortages were very real then nobody would have questioned an increase at the time. But of course the economic realities have shifted and shifted mightily,” notes Porter.

The Great Unknown

The truth is nobody knows with any degree of certainly what immediate and long-term impact(s) these rate increases will have for two of the largest economies in Canada. But in taking an educated guess it appears more people seem to be pessimistic than optimistic, or at the very least, skeptical.

“I definitely think this is too much too soon. It’s a 32% increase over 18 months without a cost benefit analysis. Because of the rapid change it’s naive to think it won’t have an effect on employer behaviour,” says Jill Colton, an award-winning broadcaster, turned YouTuber and real estate entrepreneur.

Colton, like many others, believes the rebound effect will result in a net loss of jobs, reducing workers’ hours and in the worst case scenarios, businesses closing their doors altogether.

“Sadly, wage increases often hurt the very people they are intended to help. Low-skilled workers are usually the ones that lose their job first when wages are raised,” continues Colton.

Inevitably it can be surmised that labour costs will go up at least some degree regardless of how much companies improve upon internal efficiencies. With a remaining gap still to cover, it means the difference will have to be made up by the consumer. There are certain essential products and services whereby people will simply have to grin and bear it and dig deeper into their wallets, but it leaves many others open to vulnerability, such as restaurants. It’s nice to dine out but if prices skyrocket the majority of consumers will likely opt to just eat at home.

“I just read a study that said 98% of restauranteurs surveyed will be forced to raise menu prices,” notes Colton.
The Ontario government has been providing consultations as part of a touring roadshow across the province, talking with concerned enterprise owners. But there are those entrepreneurs who say they can’t be bothered voicing their opinion because the government has already indicated the increases are a fait accompli.

“Where was the listening tour prior to bringing in this policy? Why was there no economic study done to justify the amount and speed of the increase? How her government couldn’t anticipate an outcry from business owners prior to implementing this policy is beyond me. There’s no way this would have passed if we could have voted on it – which we should have been allowed to do,” continues Colton.

As a real estate entrepreneur, Colton understands the bottom line and has done extensive research on the subject whether speaking to a local restaurant owner or tracking social media responses from entrepreneurs.

“They are all saying the same thing. Ontario has become a difficult place to start and maintain a small business. Whether it’s high taxes, hydro rates, and now, raising the min wage substantially, Ontario has become very unfriendly to entrepreneurs,” adds Colton.

When Ontario increases its minimum wage to $14 – and subsequently $15 the following year – it will have the largest minimum wage base of any province or territory. As of now Nunavut is the highest at $13 per hour while Newfoundland and Labrador are at the low end of the scale at $10.50.

International Rates

It is difficult to compare the minimum wage rates in Canada to other countries given the disparity in the cost of living and infrastructure, but the United States would be the most similar in terms of economic landscapes and industries that drive the respective economies. Rising global inequality has made minimum wages a hot topic in countries around the world, as governments attempt to ensure low-paid workers have the chance to escape relative poverty. Last year the United Kingdom introduced a National Living Wage of £7.20 ($10.25) for workers aged over 25. Countries such as Australia, Belgium, Ireland, France, Netherlands and Germany all pay higher median averages in U.S. dollars compared with Canada. Mexico and Latvia are among the countries languishing at the bottom.

Nineteen American states began 2017 with higher minimum wages. Seven states (Alaska, Florida, Missouri, Montana, New Jersey, Ohio and South Dakota) automatically increased their rates based on the cost of living, five states (Arizona, Arkansas, Colorado, Maine and Washington) increased their rates through ballot initiatives previously approved by voters, and seven states (California, Connecticut, Hawaii, Massachusetts, Michigan, New York and Vermont) did so as a result of legislation passed in prior sessions. Washington D.C., Maryland and Oregon raised their respective minimum wages on July 1, due to previously enacted legislation. Several states including Alabama, Louisiana, Mississippi and South Carolina have no legislated minimum wage standards. The lowest rate is in Wyoming where workers are paid $5.15 per hour. California and New York top the list at $15 an hour with the District of Columbia at $12.50 per hour. When averaging out all 50 states the rate comes out to about $8.25 per hour.

In Canada everyone wants to live the dream and earn as much of an income as possible. The question that remains to be answered is what level will provide the maximum benefit without hindering business enterprise that would ultimately lead to job losses. History has shown that increases to the minimum wage don’t have a significant impact on the economy – which is what the Ontario and Alberta governments are banking on. However, at no time in the past was the spike so drastic, and that is what concerns a lot of people. The provinces are charting into unknown territories and we’re all about to find out just how much it will impact on the national economy.