McGuinty Backpedals on $10 Minimum Wage
Yesterday’s Ontario budget lauded the announced minimum wage increase to $10.25 per hour on March 31, 2010.
Today, media reports indicate that, “following a meeting with business leaders in Ottawa,” Ontario’s Premier is reconsidering this increase.
The argument seems to be that, given hard economic times, we may not be able to afford a higher minimum wage. However, if the economic crisis was partly caused by a shortfall in consumer credit and spending, then higher wages to enable workers to fund consumer spending are surely part of the solution.
Governments should be striving to put more purchasing power in the hands of working people. Given hard economic times, we cannot afford to delay a higher minimum wage.
The worst-case scenario would be a weak economy depressing wages, further reducing consumer spending and weakening the economy. Such a downward spiral occurred during the 1930s. To guard against this possibility, Ontario’s government must keep a solid floor under wages by at least maintaining the minimum-wage schedule that it affirmed as recently as yesterday’s budget.
What are the positive effects of a min. wage hike to an economy? Particularly in regards to, the velocity of money and the multiplier effect.
And, why are they never taken into account when studies are done on min. wage effects?
The net effects to the economy are very small. The issue is that minimum wages are a bit player in the much larger dynamics of commodity prices, interest rates, consumer spending, net exports, government spending, etc. The only real impacts are a “possible” (i.e. debatable) 1.0-2.0% disemployment effect for every 10% increase in the minimum wage for those aged 17-24. Above age 24 the effects are minimal to the point of becoming statistically insignificant. As for the youth affected, they are a small fraction of the workforce. So the net impacts are small.
The real issue is that minimum wages serve as a mechanism that prevents free-market competition from driving down wages. Your choices are basically do the right thing or do what the business community says. Mcguinty is waffling plain and simple.
I’m BC , where about 50,000 people are on a $8/hr min wage. The NDP is promising to increase it to $10/hr immediately, if elected. If I get what your saying is that the impact of $100k/hr in the economy is minimal and doesn’t counter the possible disemployment.
How is this possible? The money will enter the economy quicker from low incomes and it will create a multiplier wouldn’t it?
You have to subtract the wage losses of the disemployment effect, and some costs may get passed along to the investor or consumer, but all told it’s still a drop in the bucket. Don’t get caught up in saying it will boost the economy. The winning progressive argument is that the downside is so small it rounds to zero in GDP figures, and is of questionable statistical significance. Then get back to the social justice argument about creating a fairer society.
Unfortunately, that argument as lost traction and will not gain any back unless there is large scale economic upheaval that shrinks the middle class.
We can’t keep arguing the social justice side, we have to show that social justice has a net benefit for everyone, via lower costs/taxes or economic stimulus. It’s sad but the mantra of doing the right thing has very minor effect on most voters.
Quimby said:
“we have to show that social justice has a net benefit for everyone”
As this is impossible under current circumstances, you have to choose sides to change those circumstances. You can’t make everyone happy under capitalism (well, unless you drug the working class really thoroughly, but then they tend not to do acceptable work).
“You can’t make everyone happy under capitalism.”
Bubble.
Just as bumbles bounce, bubbles burst.
In this case you can’t get blood from a stone. It would be nice if you could prove definitively that the progressive view had substantial economic benefits. But we already have that with education spending, socialized medicine, infrastructure spending, counter-cyclical spending, P3s, regulation of the finance sector, and a bunch of other areas. And then there are other areas where it’s a wash, like minimum wage and the size of government. Then there are other areas where the right seems to have the upper hand, and somehow I can’t think of any at the moment. So the minimum wage debate falls in the middle. It’s really a benefit to the lowest 20% of income earners, so the most compelling arguments are about whether we know people in this predicament and whether we should truly care. And yes, “whose side are you on” is a substantial part of the debate.
Although roundly in favour of minimum wage legislation and increases in line with general productivity growth in the overall economy such that relative low end purchasing power keeps up with society in general, I have developed a kind of ambivalence if the issue is portrayed as a choice over where political effort is best strategically concentrated.
There is one area that could gain political traction insofar as it could feed into the general discourse about rule of law and all that jazz and that would be demanding **active** enforcement of the existing minimum standards legislation on everything from worker health and safety, through to actually making sure the existing minimum wages were being paid.
Another strategy would be to attempt to beef-up existing MS legislation by for example insisting on a paid 20 min break every two hours and the first 30 min of the meal break paid for. Via this route the minimum wage could be increased without having to call for an increase in the minimum wage.
Apparently, he is going ahead with the minimum wage increase as originally planned.
“But we already have that with education spending, socialized medicine, infrastructure spending, counter-cyclical spending, P3s, regulation of the finance sector, and a bunch of other areas. And then there are other areas where it’s a wash, like minimum wage and the size of government.”
M-mm. If it were only about this . . . .
I have a restaurant that is struggling to stay afloat. Have not paid myself in months- personal credit decimated. My waitresses take home over $300 in tips + the $300 that I pay them. They drive new cars and I walk to work since I can’t afford vehicle repairs or insurance. This increase will cost me over $800 per month including increases in source deductions and WSIB premiums set on gross labour amounts. In a good economy, I could tolerate this. The mininum wage directive is sick.
Aryn I feel for you. I think raising the minimum wage at this point in time is not a great idea. I’m not opposed to minimum wages, I just think the timing is way off. Many companies, and small businesses are seeing sales drop, and as a result their demand for labour is dropping. Durning periods of economic growth it would seem that increases in the minimum wage have little effect on employment levels, so that would be the time to increase them. With regards to to how much employment is affected, it would seem for every 10% increase in the minimum wage there is between 1-4% decrease in employment. This depends on the study (Baker, Benjamin, Shuchita 1999 found a 2.5% decrease, Aaronson and French 2007 found 2-4%, Brown, Gilroy, Kohen 1982 1-3%). I’m sure there are many more studies out there with more data that supports or contradicts the studies I have listed. But the main point is that I think in tough times like these, the best way to boost purchasing power for lower income earners would be to raise GST and PST credits, Child Tax Credits etc… We shouldn’t be making it tougher on the businesses that employ these people.
Good or bad economy, Aryn, small business would still be screaming about their profits if minimum wage reared its head.
You wanted to play in the jungle, Aryn, better be prepared when the jungle wants to play with you.
Todd: I think Aryn was very clear when he said he would not mind it if the situation in the economy were different. Profits for small business owners is where they get their income. Does Aryn not have a right to earn a decent living himself? Or shame on him for putting in the time and money to create a business that provides employment for others, and goods and services for the community.
Thanks Chris,
I have seen studies praising the success of some models where rediculously high minimum wage laws are in place. I can even support the idea despite my personal situation. I just don’t understand how we can still apply these principles to employees where approximatly half of personal revenue comes from TIPS, largely unclaimed and often resulting in take home sums that match that of my engineer and senior management friends. In a real sense tertiary industry creates no real wealth for the state, but restaurants and food service still employs over 400,000 people in this province and is an important mechanism that allows money to circulate and the economy move along.
This is a tax grab plain and simple. The governement has projected income taxes to increase, source deduction payments to increase, & WSIB payments to increase, with no regard for the certain increase in overall unemployment that this measure will foment.
Further on this–inplementing the HST has a two fold advantage for them . One is expanding the tax base overall and the other is a thinly veiled second attempt at recinding the $4.00 rule for restaurant meals. His initial “tax grab” attempt caused the current premier great embarresmant shortly after his inauguration. Do you remember, “In order to curb childhood obesity” – lies – lies – lies. HST and the mininum wage hike ensures that his despite losing the battle back in 2003 against the family restaurant, he can still remain undefeated in his little war against us.
My only hope is that some kind of economic Darwinism closes a bunch of restaurants before it closes mine. The increased volume should keep me afloat until this moster comes up with a new, more insidious plan for my destruction.
Perhaps this increased tax revenue will help them out. Employment Insurance is Federal so the Government of Ontario really has nothing to lose.
You know that they will continue to blame all of the new problems that they create on the Feds when things go so predictably awry.
Minimum wage is a small and ineffective attempt to mitigage the damage done to the working class by central banks imposing high unemployment. Stop the banking system from creating booms and busts and let labour find its own price and minimum wages wouldn’t be an issue.
I really don’t understand why anyone that understands our money is all debt would expend so much effort on figuring out how to keep the ponzi-banking system running instead of putting all their efforts towards designing a permanent soverign money system where deposit taking institutions cannot “print money at will” and bubble us into poverty.
Stock/Derivitive and real estate bubbles are only possible because of the banking system’s ability to create limitless amounts of credit. Eliminate that priviledge and you eliminate the bubbles.
“I think Aryn was very clear when he said he would not mind it if the situation in the economy were different.”
I’m sure every owner would love to pay his employees oodles of money. Pardon me if I look on that assertion with naked scepticism, especially given the furious attack minimum wage increases get from small-business owners whenever they’re proposed. Oh, Aryn might be sincere, but so is the rest of his class when it comes to keeping wages down.
“Profits for small business owners is where they get their income.”
It’s where _every_ business owner, big or small, gets his income. And they all get it the exact same way: exploitation.
“Does Aryn not have a right to earn a decent living himself?”
In a bourgeois world such as exists now, this is a somewhat pointless question: of course he does; he’s a bourgeois. If he didn’t have that right, no business-owner would have that right and we wouldn’t have capitalism, would we?
“Or shame on him for putting in the time and money to create a business that provides employment for others, and goods and services for the community.”
He does this by exploiting workers. It’s legal, moral, and quite normal (it’s been so for about three centuries). However, I’m not about to spill one tear for an owner when the system that he helps perpetuate turns on him and savages him (which is also legal, moral, and quite normal).
Aryn said:
“The governement has projected income taxes to increase, source deduction payments to increase, & WSIB payments to increase, with no regard for the certain increase in overall unemployment that this measure will foment.”
Heard variations of this song from as far back the 20s.
pat said:
“Stop the banking system from creating booms and busts”
This happens even without finance capital; the banks just help it along.
I don’t mean to sound facetious Todd but show me a boom a bust cycle that wasn’t caused by banks.
A company can boom and bust; A town can boom and bust; even a region can boom and bust. Whole countries booming and busting (small countries and natural disasters notwithstanding) would be extremely rare (and I can’t think of any example that wasn’t caused by banks); worldwide booms and busts fogedaboudit!
I’ve talked to quite a few people about the causes of North American recessions over the last 150 years and while I can show a causal relationship between banking and boom/bust nobody has been able to cite a non-banking cause. About the most lucid statement I ever get is “I believe there is a business cycle”.
As I pointed out in a different response – go to the St. Louis Federal Reserve Economic Research website and put both MPrime and Unrate on a graph (back to the 1940s). The site automatically includes the official recession dates as gray bars and you can see the pattern clear as day. Using that data you can predict the start of every recession to within a few months from two to three years ahead of time.
Many small business owners put in their own labour. They work many hours, most often more then their employees. The profits would reflect their labour, and not exploitation.
If an owner is paid less than the employee does that not just mean his or her productivity is lower than that of their employees? That is what vanilla economic theory would tell us anyway.
Economic theory does not stipulate that workers are paid according to their contribution to the firm. It tells us is that the owner pays as little as they can get away with, i.e. the minimum that the worker would accept. Theory also tells us that the employer would never pay more than the employee’s contribution to the firm (which you can call productivity).
The difference between how much the worker contributes and their wage is where profits come from. Economists call this difference “an economic rent” and do not dwell too much on how it is distributed between the employer and the worker. In fact, theory has it that rent-seeking (or trying to get a larger share) is a wasteful pursuit that should be avoided.
In the case of the small business owner being paid less than the workers, theory would tell us that the owner’s expected future earnings must be large enough to compensate him for earning less today and still put him ahead of what he’d be making if he were to take up a job somewhere else. If that’s not the case then the owner would be better off by closing down his/her business and becoming an employee.
Well smack me silly. You better send a note to Mankiw and a long list of other vanilla text book writers on the wage not equalling MP.
Quite right on profit though, I just merely assumed our petty proprietor in question simply was not making a profit.
Most of the vanilla accounts I am familiar with argue that the residual (above the going rate of interest…so these days anything above 0.75%) arises from three sources. Monopoly rents, entrepreneurial risk bearing and innovation being the other two favourite explanations. The last two are usually celebrated as key drivers of capitalism and thus well viewed as well worth pursuing and excluding other factors of production from a share thereof.
In fact, in the innovation explanation it is the possibility of a large (temporary monopoly rents) residual which springs our heroic entrepreneur into action were he or she to have to share those innovation rents they would not be as likely to seek them out and hence innovation would be dulled. Big Pharma loves this explanation of residual.
In any case in all the vanilla accounts profits are either held to be fleeting or justified on the grounds of risk taking and innovation.
Back to our petty proprietor and vanilla theory.
If we assume he is not earning rents of the three types described above because he or she is not taking any risk, nor innovating, nor enjoying the privilege of monopoly pricing power (all sounds about right for the petty proprietor sector to me); and if we further assume that their salary is really of two component parts one of which is a wage and the other a normal return to whatever capital they have sunk into their business; then if the *wage* portion of their salary is less than that of their employee it must be because their marginal contribution is lower.
Profit:
http://en.wikipedia.org/wiki/Profit_(economics)
“Economic profit does not occur in perfect competition in long run equilibrium. Once risk is accounted for, long-lasting economic profit is thus viewed as the result of constant cost-cutting and performance improvement ahead of industry competitors, or an inefficiency caused by monopolies or some form of market failure.”
MP theory:
http://en.wikipedia.org/wiki/Marginal_product:
“In the neoclassical theory of competitive markets, the marginal product of labor equals the real wage. In aggregate models of perfect competition, in which a single good is produced and that good is used both in consumption and as a capital good, the marginal product of capital equals its rate of return. “
Chris said:
“Many small business owners put in their own labour.”
Right.
They work many hours, most often more then their employees.”
Sure.
“The profits would reflect their labour, and not exploitation.”
Wrong.
If the owner were also the sole worker (or working in collaboration with legally defined partners), this would be the case, but you’ve just said there are other employees present. This is where the exploitation comes in.
Pat said:
“A company can boom and bust; A town can boom and bust; even a region can boom and bust. Whole countries booming and busting (small countries and natural disasters notwithstanding) would be extremely rare (and I can’t think of any example that wasn’t caused by banks); worldwide booms and busts fogedaboudit!”
So any capitalist economy, which is dependent on the non-stop creation and sale of commodities (regardless of whether or not they’re needed) never goes bust because there’s always someone buying the commodities at just enough speed to keep demand coming, forever? Wow. How on earth was this utopia missed over the past few centuries?
Banks can certainly contribute to booms and busts; they could even do a large part to counter-affect booms and busts. But that is not the same thing as stating that banks _alone_ are their causes.
Iglika said:
“In fact, theory has it that rent-seeking (or trying to get a larger share) is a wasteful pursuit that should be avoided.”
Wow. Talk about head-up-ass-ness . . . .
Who came up with that dilly?
What do you think of the arugment that capitalist profits are not a result of expolitation, but do to the fact that the production process to which workers benefit, is a result of a combination of factors of production. (Rigby 1998) So the fact that myself as a worker, I am able to produce goods or services due to the fact that capital, and coordination of other factors are provided to me by the capitalist. The profit that the capitalist earns is a result of risking finanical capital to purchase physical capital, invest in human capital, and coordinate all other factors of production which are benefits to the employees. So in Aryns case, it sounds as though he owns some sort of food establishment. I assume Aryns probably pays rent for his establishment, leases or owns ovens etc… All of these efforts make it possible for cooks and waiters etc… to produce goods and services of which they benefit through wages. In many cases capitalists pay wages up front before commodities are even sold, or even before the final product is finished, this of course is another benefit to the employees.
What you’re arguing sounds much more like a post-hoc justification for keeping the surplus value created by workers (and the capital represented by ovens, equipment for cooking, the building itself, etc. pretty much aids the productivity of the worker, permitting an intensification of exploitation to take place under capitalism), not an explanation of where the value comes from.
If Aryn had his cooks do the cooking on hot stones outside of any building, the productivity would be much lower than any more modern establishment, but the exploitation would still exist.
Chris wrote:
“In many cases capitalists pay wages up front before commodities are even sold, or even before the final product is finished, this of course is another benefit to the employees.”
Mostly in restaurants workers get paid anywhere from two weeks to 0 hours after the last the meal was served. Why is it employers do not pay interest on hours worked but wages yet to be paid? That is, the worker is always working and then only later (once every two weeks) being paid without any compensation for the time between working and being paid.
And then why do workers turn around and have to pay rent on the 1st for the coming month without the land lord having to pay interest for the part of the rent they are in fact borrowing in advance?
Oh let me guess in both cases it is a risk payment to the owner of capital? No! Because in your model workers are in fact hiring capitalists to manage things for them.
In that case then the owner should receive a salary every month and the worker should receive and ***control*** the residual (profits).
Your’s is just the recycling of the great liberal Samuelson who once argued that it makes no difference if we view the worker as hiring the owner or the owner hiring the worker. Which would be true if we did not care about law, language or reality.
Tim Hortons forbids its workers from even accepting a tip and this is surely the case with most fast food franchises. Is is time to consider a two-tiered minimum wage which takes in to account tips? Should is just be assumed that working 40 hours per week in entry level positions in the workforce will always mean living in poverty?
Bohm-Bawerk would aruge that profit is justified by the abstinence theory of interest and risk taking. The arugments state that workers are basically not paid their full value of their labour because they are not the ones forgoing their consumption and providing the capital or taking the same degree of risks in the production process.
One alternative economic system is one where workers own the firms they work for. We already have worker co-ops, but they are not abundant. Most businesses which provide employment are owned by someone else other then the firms workers. There is nothing stopping people from forming together, providing their own savings, taking loans from credit unions, and taking on risks and forming their own worker co-ops. But most people apprently do not want to undertake these economic activities.
I would also correct my previous post above. I think it has already been previously posted, but Bohm-Bawerk would also aruge that wages are simply the discounted rate of the value of the product they produced. So in fact I was incorrect previously in stating that workers are not paid their full value, but are paid their full value only at a discounted rate. This is because the capitalist has to wait longer for the finale finished product to be purchased, and the profit that is earned is simply the difference between the future value of the product, and the discounted value which is paid to the worker.
Correction to my previous post:
I should have stated Bohm-Bawerk would aruged workers are paid their full value, but at a discounted rate. Capitalists have to wait longer in the production process before they recieve their income from the final sale of the product. The profit is the future value of the product or final sale price minus the discounted rate which is the wage.
I posted a second corrective post by mistake. I didn’t think the first one went through, so I am not repeating myself.
Response to Todd,
If all value comes from labour, then a gold nugget found on the ground outside a mine will have less value then a gold nugget found inside a mine after many hours of labour. Wine gets more valuable over time, and the value increases without any extra labour being involved.
Ah nothing like an abstinence theory of profit to warm my cold dark heart.
On risk:
Just ask a skilled worker facing unemployment and a declining sector if workers take on risks when they make their training choices. Why should human capital investment be treated as different from other forms of investment?
On cooperatives:
Perhaps if cooperatives could get access to the same depth and breadth of credit/capital markets there would be more. Have you ever walked into a bank and asked for a small business loan (forget a large one) and presented a business plan based on a cooperative model. Like watching paint dry…the enthusiasm emanating from the other side of the desk. Sure you could go to the venture capitalist and he or she would demand what percent of control? Not really a cooperative.
On the LTOV:
Wine has to be warehoused and cared for during maturation all of which Marx would include in the definition of productive labour.
Aaron you know well that in a LTOV price formation is different than price selection. The basic price (call it an attractor price) of gold is determined by the average cost of pulling it out of the ground determined on a sector wide basis. If you are lucky enough to find a surface gold mine with nuggets just sitting there you make above average profits. If you are unlucky enough to have a South African gold mine you make below average profits.
In any case we all know the price of everything is measured in corn! Just ask Steedman.
Just ask a skilled worker facing unemployment and a declining sector if workers take on risks when they make their training choices. Why should human capital investment be treated as different from other forms of investment?
My response is it shouldn’t. But the degree of risk involved is different between workers and owners. Owners potentially can loose millions, even billions on their investment. In the normal course of production, the capitalist pays the worker their wages regardless of the fact the final product may or may not be sold. So i totally accept the fact that the risk of job loss is a large risk to the worker, I would however argue that do to the fact it is easier to find another job in the same industry, or an industry that requires similar skills then it is to recover from lost investment. The arugement that workers create the surplus value should also imply that workers are responsible for net losses to companies. But we still see workers getting paid their wages in many instances regardless of the fact a company may not be making making money. That is part of the risk the capitalists bears and not the worker.
On cooperatives:
I tried to distinguish between credit unions and banks. Credit Unions are claimed by their advocates to put the owners/clients first before profit. Credit Unions can be large institutions as well, just look at VanCity. The whole credit union model is based on the cooperative business plan, and their goal is to serve communal purposes.
“But the degree of risk involved is different between workers and owners. Owners potentially can loose millions, even billions on their investment.”
Depends on how you (dis)aggregate it. Sure an individual worker takes relatively minuscule risk in comparison to the total investment of the owners but taken as whole workers have a huge amount of capital tied up in their general and specific skills. You could argue that any individual investor takes little risk in comparison to the total investment of all the owners. Institutional investors are just aggregations of individual investors (a pension fund for example).
“In the normal course of production, the capitalist pays the worker their wages regardless of the fact the final product may or may not be sold.”
Sure makes sense for autos but not much sense for min wage workers at restaurants (which was the original thread). I would also add that unlike capital workers must physically replenish themselves in order to work. So an auto plant which did not pay until all of the cars workers produced were actually sold may find itself with a greatly diminished labour force.
“But we still see workers getting paid their wages in many instances regardless of the fact a company may not be making making money. That is part of the risk the capitalists bears and not the worker.”
Yes and we also see capitalists paying the same wages even when they are making higher than average sales/profits over the course of business cycle. So they take the down side risk but only because they get the upside too. In the extreme case of bankruptcy owners/creditors are ahead of both outstanding salaries and pension obligations. Ask a retired worker from Abitibi Bowater how much risk they are exposed to right now (both individually and collectively).
On cooperatives:
“The whole credit union model is based on the cooperative business plan, and their goal is to serve communal purposes.”
That is great but a credit union pools community capital, it does not fund worker cooperative ventures on an industrial scale. Your post seemed to insinuate that workers do not want to be owners. I was simply asking if that was true or if it was that workers did not have access to the capital required to become owners.
Think of an analogue:
Consider a situation in which a mandatory down-payment of 25% was required to by a house in that case many renters would like to be owners and many would be capable of paying the mortgage but they do not have access to the down-payment. We would not then conclude that renters just do not seemed interested in owning a house even if that might be the case for some renters.
required to *buy* a house
“But the degree of risk involved is different between workers and owners. Owners potentially can loose millions, even billions on their investment.”
If a company goes bankrupt as the result of the owner’s mismanagement, the owner could lose billions and still live comfortably as a millionaire. While a worker could lose his job, end up on welfare without enough money for food and die prematurely.
By the rules of capitalism the owner has lost more, but by any other standard the worker has lost more.
Raising the minimum wage isn’t as great a thing as everyone thinks…It has a negative impact on the economy and will throw off the equilibrium wage and equilibrium quantity of labor and…oh hell with it, this guy explains it a heck of a lot better than me: http://www.mindreign.com/en/mindshare/Global-Economics/Minimum-Wage/sl35291137bp509cpp10pn1.html just and interesting theory most people should consider before supporting a raise in minimum waige
Does that link to _all_ of this person’s “theory”, or is there more you have to log on to read?