Ontario Minimum Wage Increase. Good or Bad?

The flurry of news and commentary regarding Ontario’s wage increase has been dizzying not only because of the amount of commentary but because of how definitive people seem to be despite the stark contrast in arguments they are proposing.  Those on the left like the Globe and Mail and Toronto Star tend to push for view that increasing wages increases the spending of employees as consumers and thus improves the economy, while those on the right like the National Post and The Fraser Institute push for the view that increasing wages compromises business and the economy.  Supporting both sides is a hodgepodge of shoddy evidence. At the same time we have such a conflicting set of testimonials from business owners regarding how they interpret the wage increase with some saying that it’s horrible, unfair and inequitable and others saying that it is just fine and makes complete sense.

What is going on? 

These two perspectives are talking passed each other because they fail to understand the intricacies of business decisions. Those on the right, often sympathetic to economic theory, like to think that they have expertise at the business level while those on the left, less sympathetic to economic theory, like to think they understand the role of employees in firm success.  But neither of these camps do.  There are at least two missing pieces to the puzzle here that both explain why there is insufficient evidence to support either side, why we have a dichotomous set of testimonials from businesses, and why these two groups (right and left) keep talking past each other. 

1)    Businesses are treated like black boxes.  The first reason is because both perspectives tend to think of businesses as black boxes.  Did you notice which types of companies have voiced the most concern over the wage increase?  These are companies that primarily compete on cost and see very little value in how their employees contribute to their customer value proposition.  Tim Horton’s over the last several decades has sold its soul and has become the no frills of the coffee chain industry.  They succeed by fishing at the bottom of the barrel.  Their food products are egregiously unhealthy because they use the lowest cost ingredients, the coffee is absolute garbage and over the years they have stripped away any of the skills required of its employees by centralizing any and all value add and thereby removing it from the stores.  Tim Horton’s has moved, from a personnel perspective, as close as they can to having robots behind the counters.  Add a takeover by a ruthless value sucking parent firm and this low cost endeavor becomes a science.  So a wage increase will naturally kill TH franchisees because their basic business model is predicated on exploiting any and all low cost opportunities.  If the Ontario government is reining in a wage that is unlivable, is it their fault that those businesses that have been benefiting from paying their staff the lowest wage possible will suffer?  This is not the fault of franchisees either as much as it is the fault of TH’s management team, board and now parent firm that have, for years, continuously stripped any and all value at the store level for their own pockets. 

This is in stark contrast to other businesses who see the value in paying employees a living wage.  What do I mean by value?  One of the biggest issues with small businesses is trying to find employees who live the values and beliefs of the owners.  This is a huge endeavor but an important one because the more disconnected the owner is from their consumers (simply because the business is growing and they need to sleep some of the day), the more vulnerable is its value proposition.  This happens all the time.  Think of the disparity in customer experiences you have when you go into a store and the owner is behind the counter versus when an employee is behind the counter.  It’s oftentimes alarmingly different.   This means that smart business owners who are not competing on price need to find employees and treat them in such a way that they see value in what they are doing beyond earning a living.   A wage increase likely aligns closely with the need to demonstrate to these employees that the owners really value their contribution to the business. 

So, in sum, unless we control for the type of strategic positioning businesses are using in the marketplace, the evidence associated with the benefits and costs of wage increases will remain unclear because businesses will respond in such a variety of ways that they cancel out any definitive aggregate outcome. 

2)    Tragedy of the Commons:  The second reason why the left and right end up talking passed each other is because they tend to overlook the tragedy of the commons.  To quickly review: we, as a society, destroy the commons because each and every one of us has an incentive to be the first one to renege on a collective goal because the earlier we do so, the more we gain individually.  At the same time, the benefit one gets from preserving the commons is tiny because it is shared with the rest of society.  Think of sitting in a traffic jam.  The first driver to defect from the rules and use the passing lane on the right that is clearly closing will benefit substantially at the expense of everyone else behind her who has to slow down to compensate for her aggressive action.  Yet, staying in traffic for the benefit of everyone is difficult to swallow.  Even though as an aggregate we are all better off by being patient (because there is less stop and go), the individual driver is much better off. 

So the commons in the wage hike is that more disposable income will be available in society which will then be spent, thereby lubricating the economy.  This is not because new money is introduced into the economy but because the money that is already in the economy is more equitably dispersed.  People tend to forget that the wage increase is an income equality policy that indirectly stimulates the economy because people in the lower rungs of the income ladder spend more and less money is locked away with the rich. 

So what’s the tragedy?  The benefit to the commons is only realized if all businesses refrain from countering this wage increase.  The tragedy is that the first few owners to defect by cutting employee hours/benefits or increasing prices will benefit personally by countering the wage increase that would otherwise remove some of their profit.  As soon as enough businesses use this countering strategy we reach a tipping point where not enough money is given to those in lower income brackets and the policy looks like it didn’t work. But, like the traffic example above, if all small businesses were to take the cut we would all benefit moderately and those businesses that worked hard to add value to their product/service would be rewarded with increased market share because they would be the first to grab the growing market of people with money to spend.  The important and often overlooked point here is that the wage increase incentivizes businesses to find ways to better meet market needs.  

In sum, the arguments of the right and the left are tempting to believe.  They are both right but for the wrong reasons.  The right is correct that a wage increase will not improve the economy but not because all businesses are left without a choice but to cut back and increase price.  The left is correct that a wage increase will improve the economy but not because all employees will now have more money to spend.  It all depends on the type of value proposition the business is using and the extent to which business owners are collectively mature enough to see the merits a shift in income dispersion could have for their business and for society as a whole.