Explaining the Basic Economics of the Minimum Wage

Lori Lee Oates, Ph.D., writing for the CBC, writes The time is now: We can no longer wait to act on poverty and the minimum wage.

It has often been said that the COVID-19 pandemic has exposed the fragility of our economic system and the inequalities that are inherent in it. It has also exposed the precarious nature of how a lot of people live in the contemporary world.

Many of the inequities in our society are inherent, and have little to do with the economic system.

In Newfoundland and Labrador, minimum wage and poverty reduction recently became important issues in the Liberal leadership contest. Premier-designate Andrew Furey ran on tying minimum wage to the Consumer Price Index so it would automatically go up when the cost of living goes up.

If state power is going to be used to manipulate wages, tying them to the CPI doesn’t seem like a big deal. The market will, as always, adjust to government intervention. Nothing Furey does will prevent a future government from changing things again.

He also announced during the campaign that he would renew the focus on reducing poverty across the province. He said that he will address the complex roots of poverty and that he will undertake robust consultations to take a multifaceted look at the problem.

This seems like an empty promises if there is no concrete plan.

These are good things. However, it must be acknowledged that the minimum wage in Newfoundland and Labrador is not a living wage. This means it is not enough money for someone who works 40 hours a week to pay for basic expenses such as rent, utilities and groceries.

The minimum wage is not intended to be a living wage for a full-time worker.

It must also be acknowledged that we already have enough information to know that poverty is a very real problem in this province and that it must be addressed immediately.

How must it be addressed?

The minimum wage in Newfoundland and Labrador is $11.65 an hour. It is set to reach $12.65 plus a national CPI bump in October 2021. The goal was to be more closely aligned with the minimum wage in the other Atlantic provinces.

Do the other Atlantic provinces tie their minimum wages to the CPI?

The advocacy group Fight for $15 & Fairness estimates the living wage in this province to be $18.85 an hour. This raises the question of why a living wage is not seen as a basic human right and codified in law.

A living wage cannot possibly be a basic human right, because it conflicts with actual human rights. If we all agree to voluntarily provide for the poor, that is one thing. If forced redistribution of wealth is required to achieve a living wage for all, that is theft. If we are compelled to ‘give’ by the state, at threat of removal of our freedom, a living wage can’t possibly be moral. Nothing that compels theft is moral.

An estimated 70,000 people in this province (or 13.4 per cent of the population) earn the minimum wage. Women make up 57 per cent of minimum wage earners in Newfoundland and Labrador. Approximately 30 per cent of the population earns $15 or less per hour. That is almost one-third of the population.

How many of those people are independent and in poverty?

Ontario and Alberta have already increased their minimum wage, to $14 and $15 respectively.

Not without issues. See my post Consequences of Raising the Minimum Wage. Regardless, is what’s right for Ontario (home to most of Canada’s manufacturing) and Alberta (a province rich in oil and other resources) right for Newfoundland?

Contrary to traditional arguments, minimum wage helps boost the local economy because the money is almost invariably spent at home. It boosts tax revenue and reduces the cost of social programs.

This is absolutely untrue for anyone who loses their job due to the increase. Increased spending power for those who do keep their jobs will be offset to some degree by increases in prices to deal with increased labour costs. Workers already making the new minimum wage will be unhappy because those that have just entered the job market will now make as much as they do.

As a society, we need to get past the idea that minimum wage is something paid to teenagers and students who need pocket money.

As long as businesses are required to pay teenagers and students the minimum wage, how could we possibly get past this fact? Requiring businesses to pay teenagers and students the same amount a full time worker needs means businesses will be forced to hire less teenagers and students, which is bad for both parties. For cost sensitive businesses (like Tim Hortons), this will push owners to accelerate efforts to automate, removing more entry level jobs.

The economy has shifted in powerful ways since the 1980s, with most of the job creation in service sectors. We are now living in a world in which Walmart is the largest employer globally.

High paying jobs manufacturing consumer goods were shipped to China by the globalists and replaced with low paying retail jobs selling the cheap crap produced by slave labour in the third world. This is an argument for tariffs against anticompetitive third world business practices.

We are also living in a world in which Amazon CEO Jeff Bezos’s net worth recently jumped $13 billion in a single day. This represented the largest wealth increase in a single day since the Bloomberg Billionaires Index was created in 2012.

Like most very wealthy people, much of Bezos’s wealth is in equity in his own company. Were he to sell this off, he would weaken his control of the future of Amazon and potentially harm confidence in its stock, which would then devalue his remaining worth. Stock is not cash in the bank. It goes up; it goes down.

Service sectors are the fastest-growing industries in the world. However, they frequently pay their employees less than a living wage. Notably, Walmart and Amazon employees were deemed essential during the COVID-19 lockdown.

Because people need to buy food, the state cannot force the closure of stores that sell it. Those in power realize that this would be a bridge too far, and trigger a vote of non-confidence and massive civil unrest. This makes the service essential. Grocery workers, however, are not comparable to firefighters, whose jobs are far more dangerous, or doctors and nurses, who require significant post secondary education and practical training to do their jobs.

Of course, any increase in the minimum wage should also be accompanied by tax cuts for small business. We absolutely must to do a better job of supporting local businesses.

Synchronizing a tax break with a minimum wage increase is a good idea.

In the age of the gig economy, many people are being forced to choose the self-employment route. This year has shown us how precarious employment with a small business can be.

Choosing to be a contractor is normally done because pay is higher and work is more flexible. People who want less precarious employment shouldn’t opt for contracting. I understand that this isn’t always possible.

Our leaders also need to recognize that there is a big difference between locally owned small businesses and multinationals such as Walmart or McDonald’s.

Walmart and McDonald’s are completely different. McDonald’s restaurants are usually franchised, meaning they are locally owned small businesses.

Often these big businesses come in and crush local businesses. They achieve large corporate profits while their employees live in poverty and rely on government programs, with few to no benefits.

I agree that Walmart outcompetes small local business by operating at scale, efficiently. It’s up to people to shop elsewhere if they value local businesses. This kind of retail has incredibly slim profit margins, so it’s not surprising that they are cutting costs on wages and benefits.

In 2017, it was determined that poverty was on the rise in Newfoundland and Labrador. In 2019, there were 32,600 beneficiaries of income assistance in Newfoundland and Labrador. Even though the numbers have declined throughout this century, they have been relatively consistent over the last three years.

So is poverty rising, declining, or relatively consistent?

Certainly, we have seen positives, such as a reduction in the income tax paid by low income earners in 2018 and again in 2019.

Wouldn’t it be a positive if they paid more tax? That would indicate that they made more money.

There have also been expansions of programs such as Newfoundland and Labrador’s prescription drug program, funding for women’s centres, and the introduction of a wage subsidy program.

Meaning higher taxes. If income tax paid is going down for the poor, that means it must be going up for someone else.

However, the reality is that what our citizens really want is a living wage. People want an opportunity to earn a fair living more than they want charity or government programs for low income earners.

Understandable, and laudable.

It is almost impossible to break out of the cycle of poverty when most of the jobs are being created in areas that do not pay enough money for families and individuals to live on.

What you need are entrepreneurs who will create higher paying jobs. What’s your strategy for encouraging them?

We know that a living wage is one of the best ways to stimulate our ailing economy and combat poverty. We must also get to a place where it is seen as a human right.

If you raise the minimum wage to eighteen dollars without doing anything to attract and create new higher paying jobs, you will merely force existing businesses to close one in every two entry level jobs in order to keep their costs constant. Over time, they will increase their prices, devaluing their worker’s purchasing power, and things will return to something like where they are now. You will create short term pain for some, and short term gain for others. What you need to do is increase the size of the pie, not change the way you divide it up.

About jimbelton

I'm a software developer, and a writer of both fiction and non-fiction, and I blog about movies, books, and philosophy. My interest in religious philosophy and the search for the truth inspires much of my writing.
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2 Responses to Explaining the Basic Economics of the Minimum Wage

  1. Back before Prohibition and The Crash forced the U.S. off the gold standard, inflation meant a localized rise in prices (as in a gold rush mining town). Now it means that printing paper money doesn’t fool anyone, and that supply and demand inexorably affects the buying power of fiat paper. Heinlein suggested plutonium or KW-hours as a basis for currency, and I’m damned if I can find fault with either idea. Gold easily becomes radioactive, and in violent situations could quickly become a liability or at least tainted by justifiable suspicion.

    • jimbelton says:

      Cryptocurrency is also interesting. The nice thing about gold is that the amount of gold per person in the world has remained remarkably constant for centuries. If we made Uranium the currency backer, it would sure be good for Canada. If fusion power ever pans out, backing currency with KW/h might be a bit of a disaster.

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