02 December 2019

Setting minimum wage #nlpoli

The minimum wage should be tied to the economy, predictable, transparent, and removed from political interference.
One way of setting minimum wage that meets those criteria would be to take half the average hourly rate for non-unionised employees for the previous fiscal year and increase it by the annual provincial rate of inflation for that year.
Using that method, the 2019 minimum wage would have been $11.58 on April 1, 2019 instead of $11.40.

The current discussion about minimum wage in Newfoundland and Labrador is entirely a political debate between two groups over the arbitrary number to be assigned as the minimum value for the labour of about 13,000 workers in the province.

That’s about five percent of the labour force in Newfoundland and Labrador but the amount could have a larger impact on the economy.  That’s not because, as proponents of a higher arbitrary number assert, more money in the pockets of workers boosts the economy, but because about 40% of the labour force makes less than the arbitrary number proposed by unions in the province.  

Raising the minimum wage to $15 an hour gives them a powerful argument for hourly wage increases for *their* members who would magically become minimum wage workers. This would create pressure to raise those wages back to their former position above the minimum wage.

This is why the unions are concerned about the floor price for labour in the province at all.  They look after the interests of their members. They want to use the minimum valuation of labour as a means of achieving what they cannot through collective bargaining.

On the other side of the argument, groups representing employers oppose any increase in labour costs, understanding that the argument is not really about minimum wage employees but about the rest of the labour force.

Both sides employ evidence selected to support their pre-determined conclusion. Much of this “evidence” is produced by organizations tied financially and otherwise to one side or other of the debate over an arbitrary number. 

Selective perception

Research by those allied organizations and by third parties that may be cited in the debate generally tends to be unhelpful for policy decision-makers.  It tends to support an obvious conclusion of one sort of another.  One of the more popular arguments in favour of a higher minimum wage is that people with higher wages spend more money and therefore stimulate the economy. 

On the other side, one can find a variation on the standard argument that increased labour costs of any amount will lead to job losses.  Opponents of higher minimum wage have largely abandoned the argument that *any* increase will produce job losses since more recent, credible research has shown relatively small increases in minimum wage have no discernable impact on employment levels. They still maintain that larger increases will cause job losses.

Advocates of a $15 per hour minimum age rate will counter with experience elsewhere of positive results from increases to their preferred amount.  But like all the arguments on either side of the debate about minimum wages it leaves out crucial information.

The examples of positive impacts from higher minimum wage are from places where the economy is robust, even if, as in Alberta, the economy is not currently experiencing the kind of growth it did five years ago.  In such places, the marketplace is delivering higher costs across the board and businesses adapt accordingly.  They may lay off employees in some cases but in others they will respond with high wages.  If a growing economy produces a labour shortage at the low-wage end of the market employers adapt by providing other benefits, such as health and prescription drug insurance, in order to remain competitive.

The Local Market

No one in Newfoundland and Labrador has made an argument on either side of the minimum wage debate about the situation in *this* province, however.  A $15 minimum wage is touted as “fair” as a “living” wage, meaning that a person working full-time at that hourly rate would be above the poverty line.  It is simply not possible for this arbitrary amount to be a living wage in Manhattan, Seattle, Edmonton, Toronto, and Burgoyne’s Cove at the same time and over a five to seven-year span yet that is precisely what the $15 and fairness campaign has claimed.  

We know, for example that $15 an hour actually produces an annual gross income for full-time workers – exclusive of other income such as tips, health benefits etc. – that is almost four dollars an hour *lower* than the poverty line.   Yet advocates of a significant minimum wage increase in Newfoundland and Labrador stick to the arbitrary amount that is part of the continent-wide political action campaign and recite all the slogans that support it even while acknowledging the evidence is that their number is too low to be a living wage.

There is no research available publicly that looks specifically at the impact of such a minimum wage in Newfoundland and Labrador or in a good analogue to Newfoundland and Labrador.  Nor is there any research available that examines what parts of the labour force are affected by changes to minimum wage in *this* province.  Thus, any assertions about the positive or negative impact of a particular wage on this province’s economy are nothing more than unsubstantiated speculation, at the very best. 

What is more, the current arguments about minimum wage tend to either introduce or ignore relevant information. For example, proponents of the $15 living wage ignore the other forms of compensation   - tips, added benefits – that positively affect those who are only nominally working in minimum wage positions.  Those opposing minimum wage increases do the same thing, albeit for different reasons. 

One of the leading opponents of increases in minimum wage is the bar industry.  This is a highly competitive business in Newfoundland and Labrador that is also very poorly understood outside the industry.  Given the survival of so many bar businesses even in tough times, it is fair to assume that the profitability of any given enterprise is affected by many things beyond minimum wage.  After all, this is an industry where employees and some bar owners acknowledge that workers make more in tips than in wages. And yet, this industry is one of the strongest opponents of minimum wage increases.

What both sides ignore, however, is that the market still determines compensation even in those parts of the economy that tend to pay employees based on the minimum wage.  As noted, businesses will respond to market conditions.  A shortage of labour will produce either higher wages or added benefits or a combination of both in an effort to recruit and retain workers.  In sectors where the overall cost of labour - often induced costs such as advertising, recruiting etc., due to high turn-over or chronic shortages - is chronically high, employers will look to other ways of addressing cost increases.  Automation for ordering in the food service or in the checkouts at major grocery stores is a good example of such an adaptation to labour issues, not just the cost of labour.

Other Issues

Advocates of a higher minimum wage raise issues about poverty in the province that should be addressed.  They should be addressed however, through other means than the minimum wage laws.  The provincial government has many ways to deal with poverty in the province.  Minimum wage is only a small portion of a larger issues.  Given that minimum wage is not really the minimum compensation for most employees in the province it makes more sense to look more broadly at poverty.

One place to look would be the Labour Standards Act itself.  While it has been modified many times since, the current Labour Standards Act dates from 1977.  Many things have changed in the economy in 43 years.  The basic labour standards law for the province should reflect those changes.  A revised labour standards law should also address inconsistencies, such as with public holidays, that affect compensation.

There are also new ideas, such as Basic Guaranteed Income or reforms to employment insurance, that would affect compensation for employees.  The current minimum wage review’s public consultation has introduced the basic income idea into consideration but in a way that is confusing to anyone unfamiliar with the idea.  If we are going to discuss policies aimed at reducing poverty or lessening the consequences of low income, we need to have a proper public discussion of all the issues and all the possible solutions.

Setting the Minimum Wage

The provincial government’s review committee has two questions to answer.  The first is how the minimum wage ought to be set.  The second is what the rate should be for the coming fiscal year.
The public discussion to date has focused on the second question and not the first even though the question of what factors should determine the wage are more important.  Implicitly, proponents of a higher minimum wage and their opponents are content to stay inside the current framework and set a wage that is connected to nothing in the economy that must produce the money to pay for it.  This hardly seems sensible.

Both business and labour have supported the notion that the rate should be predictable.  Generally, one would expect a modern public expectation that the process by which ought to be transparent.
The International Labour Organization proposes that minimum wages ought to be guided by the following criteria:
  • “A balanced and evidence-based approach is necessary which takes into account, on the one hand, the needs of workers and their families and, on the other, economic factors.”
  • “An evidence-based approach also implies that there should be clear criteria to guide discussions on the level of minimum wages, as well as reliable statistical indicators to support governments and social partners in their deliberations.”
  •  “To maintain their relevance, minimum wage levels need to be adjusted from time to time.”
  • “Because the social and economic effects of minimum wages are never fully predictable, it is essential to ensure that the impact of minimum wage adjustments is adequately monitored and studied.”
Based on those criteria the current approach to setting the minimum wage in Newfoundland and Labrador is a failure.  The method of setting the minimum wage is not balanced or based on evidence.  It is not guided by clear criteria and generally is disconnected from any reliable statistical indicators of any sort.  The minimum wage in Newfoundland and Labrador is chosen arbitrarily after – in this case – a short round of public consultations the terms of reference for which are not public.  

The review is tasked with looking at the minimum wage alone without looking at other factors, some of which are noted above, that may affect the standard of living of those who are paid minimum wage.

To address broader issues of social policy including minimum wage, the provincial government should undertake a review of its social policies.  This review would give both groups and individuals the opportunity to set policy for the next decade and address many issues that are currently ignored in public and political discussions.

That still leaves us with the matter of the minimum wage right now.  The current rate was set by using the previous minimum wage and increasing it by the annual inflation rate for Canada. 

Whether intentional or not, the 2018 minimum wage in both Alberta ($15.00 per hour) and Newfoundland and Labrador ($11.40 per hour) is approximately half the average hourly wage for non-unionized employees in the province for the previous calendar year, according to data compiled by Statistics Canada. 

One can say many things about using such a benchmark to set the rate, but it does have the merit of being transparent, predictable, and, tied in a concrete fashion to the current local economy.  Using this benchmark would also have the benefit of discarding the intensely political approach that are used currently to set rates.

Rather than have minimum wages lag the current marketplace by any period of time, we could raise the previous average by the provincial rate of inflation.  This would be less predictable than the Canadian method since the local economy tends to expand and contracted to a greater degree than the national average does.

To give a sense of what that would mean in practical terms, we can calculate what the 2019 minimum wage would have been using the method described here.  Half the average hourly wage for non-unionised employees at the end of 2018 was $11.40. The inflation rate was 1.6%.  That would produce an annual minimum wage in 2019 of $11.40 X 1.016 or $11.58. 

Any employer or employee would be able to calculate this amount using information that is readily available in public from Statistics Canada and the provincial government’s finance department.