High-wage aspirations demand better productivity fundamentals

Across North America, there is growing public and political support for lifting the legislated minimum wage. In Canada, Alberta and Ontario recently adopted plans to reach a $15-an-hour minimum wage by the end of the decade. British Columbia’s new NDP government intends to follow suit, albeit based on a more gradual schedule of wage rises. Across the border, a steadily increasing number of U.S. states and cities are also hiking minimum wages.

In part, this trend reflects concerns over a shrinking middle class and widening economic inequality – especially in the distribution of wealth. There are also worries about the proliferation of contingent and “precarious” jobs and the challenges facing many working families with young children. A substantial segment of the population feels left behind in terms of overall prosperity. All of this has added to the pressure on governments to revisit aspects of labour and employment policy.

In the B.C. context, moving to a $15-an-hour minimum wage will have non-trivial effects on the economy and labour market. Many lower-paid employees should gain, as their overall earnings grow – a point often overlooked by minimum-wage critics. But profit margins in some industries – especially service industries that rely disproportionately on relatively low-paid staff – will come under downward pressure. And some jobs will disappear as employers’ payroll costs increase.

A rising statutory minimum wage can be viewed as a policy intervention that seeks to nudge higher the share of total income that accrues to labour rather than to owners of capital, with a particular focus on lower-paid workers. But it comes at a cost.

An important but overlooked fact is that Canada has one of the highest employment rates for young people (aged 15 to 24) among all advanced economies – 57%, compared with an average of 41% for the countries that are members of the Organization for Economic Co-operation and Development. Indeed, more than three-fifths of minimum-wage earners in Canada are under 25. They stand to be most affected by a higher minimum wage – as beneficiaries (if they retain their jobs), but also in a negative way to the extent that an escalating minimum wage causes employers to cut back on the use of labour. While a higher minimum wage can be justified, the biggest medium-term risk associated with this policy is that a rising fraction of young and other inexperienced entry-level workers are priced out of the formal job market – a pattern seen in several European countries.

As of mid-2017, B.C.’s minimum wage amounted to 45% of the average (all-industry) wage. At $15 an hour in 2021, we estimate that it would equal 55% to 56% of the average industrial wage, assuming the latter rises by 2% a year. Focusing just on part-time workers, currently the B.C. minimum wage is equal to 62% of the average part-time wage; at $15 an hour in 2021, it would be roughly 80% of the average part-time wage.

It remains to be seen how such changes in the minimum-wage-to-average-wage ratio will play out in the job market. Our expectation is that a higher minimum wage will weigh on the demand for low-skilled and other entry-level workers. It will also prompt more employers to automate and substitute capital and technology for labour in their businesses.

In short, while some benefits will certainly flow from a higher minimum wage, caution is warranted as the new B.C. government delivers on its election commitment. To this end, we offer three recommendations.

First, hold minimum-wage increases to modest annual levels. Large, one-time jumps should be avoided.

Second, carefully monitor the impact of a rising minimum wage on the overall demand for labour. If hiring drops off sharply for young and other inexperienced workers, the government could consider a two-tiered structure that includes a lower (but time-limited) minimum wage for some types of entry-level jobs.

Finally, the province should take a go-slow approach to other policy interventions that would further drive up payroll costs, at a time when wages for lower-paid workers will be climbing.

Ultimately, it’s the all-in cost of labour relative to worker productivity that influences employers’ decisions around hiring, promotion and retention. If policy-makers want to build a high-wage economy, they need to start thinking about an agenda directed at raising productivity across the business sector. Success on this front will require more B.C. firms to scale up; increase investment in machinery, equipment, technology and productivity-enhancing infrastructure; and improve workforce skills. 

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.