Ontario's experiment with minimum wage could transform Canada's economy: Don Pittis

Reading any statementfrom an economiston the subject of minimum wage, you might think the eventual results are unequivocal and well understood.

The strongest critics of Ontario's sharp hike on Jan. 1in the hourly rate from $11.60 to $14 use traditional economics to predict certain doom foran economy devastated by plungingemployment.

Of course, supporters of the increase take the opposite view, saying it will stimulate the economy by putting money into the hands of the poorest, who will actually spend it.

In spite of research purporting to support these opposing sides, the issues are so complex, so entangled with other economic impacts, with politics, withemotion, that exactly how the rise in wages will play out is far from certain.

Economists around the world are enthralled by what is effectively a hugeand radicalreal-life experiment. The laboratory is theCanadian economy. The lab rats are us.

And partly because Ontario's 21 per cent increase is so steep, no one is really sure how it will turn out,says labour economist David Green.

"Most economists, even economists on the left, are worried about how fast that is going up," says Green, a professor at the University of British Columbiawho has made a career of studying how the price of labouraffects other parts of the economy.

While this increase is happening in a single province, that province is Canada's most populous and most industrialized. It includes rich cities and rural backwaters. And if itdamages the economy, it is reasonable to assume that damage will have an impactacross the country.

Whether it succeeds or fails, and how, willstand as a lesson for other jurisdictions.

Unique opportunity for economists

For economists, used to having to extract meaning amidthe noise of other economic forces, this sudden change in the price of labour is a unique opportunity.

"When you see a wage go up, you're like, is that because demand has increased? Is it because supply has increased? How are those things interacting?" Green explains. "Here somebody actually comes along and just moves a price for you. And so you get to see things that help us understand how the labour market works."

As Yale economist Robert Shillerobserved last year, the things that move our economy are seldom clinical and mechanical. Often far more important is the story we tell ourselves about what is happeningwhat he calls "narrative economics."

Part of the current popular narrative is the growing gap between rich and poor, which, aspolls have repeatedly shown, Canadiansdon't like.

Observe the astonishing reaction to the CBCNews story broken last week by Aaron Saltzman, with the narrative of super-wealthy Tim Hortonsbosses wintering attheir southern estate while cutting the benefits of the minimum-wage workers who help generate their wealth.

• Tim Hortons heirs cut paid breaks,benefits

Previous attempts to redistribute wealth throughtax reform havefaced atraditional-media backlash.

Previous studies have shownprice increases will come, but economists say theyshould be small. For example, if minimum-wage labour contributes 10 per cent of a product's value, final prices would rise by about twoper cent.

Sometimes outside forces such as competition or a consumer backlashmean business owners must swallow some of the cost increase out of their profits or look for savings elsewhere.

Will poor people be worse off?

A minimum-wage hike isnot necessarily bad for business, because all businesses have to pay it. Some say businesses will move operations to lower-wage parts of the world, but even that is disputed. Others say the poor will be worst affected as consumer prices rise.

Other strange features have been observed following minimum-wage increases. One is that after a hike, layoffs actually go down. Companies known to profit by paying their workers well, such as B.C.'s White Spot restaurants andCostco, do better at the expense of those using a low-wage strategy, such as Tim Hortons or Walmart.

But at the heart of the increase is the politicalissue of social fairness, says Carleton University professor emeritus Allan Moscovitch, who says the minimum wage was initially intended to provide enough income to support a family.

That has slipped over the years so that working families who try to survive on a single minimum wage live in poverty.

Guided by the tradition ofBritish poor laws, he says, social service payments are alwaysheld below minimum wage. That means sharply higher minimum wages may eventually result in welfare payments closer to the poverty line.

As Ontario Premier KathleenWynnesaid last week, businesses never think it is a good time to raise the minimum wage.

"Ontario is doing very, very well right now. Corporate profits are high," Wynne told the CBCNews. "And so it just makes no sense that this is not the time."

"It is the time," she said.

Time for an election

Moscovitch archly points out that it is also the time for Wynne and her Liberal Party to move left and take votes from the New Democratic Party in the provincialelection scheduled for June. But that political motivation may create a rare window to do something governments have been avoiding.

It is true that studiesaround the2008 economic slump in the U.S.have shown that the success or failure of a change in minimum wage depends on the conditions of the wider economy.

On Friday Canadian job creation hit another high and unemployment hit another low. Perhaps this time the real-life experiment will work out.

Whatever the result, it maysettle some economic arguments. More likely, it will spark a new round of arguments over whether the Canadian economy would have been better or worse off if the changes had never happened.

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