According to finance experts, the minimum wage increase in Ontario will hurt the local economy and result in more unemployment over a period of 2 years. Wynne, on the other hand, believes that the proposed reform is good for the local economy because low wage workers spend their money in Ontario which helps improve the economic climate in the province. With the new minimum wage increase they will have more money to spend on goods and services. In his view, low wage workers are particularly vulnerable, and the wage increase is great news for them. Businesses in Ontario are doing well and the economy is actually booming. But is this really the case?
The New Legislation and Key Points
The liberal government introduced new legislation to gradually increase the minimum wage from $11.40 to $11.60 in 2017 and $14 and $15 as effective in 2018 and 2019. The new legislation also introduces equal pay for seasonal, casual, temporary, and part-time workers with the same job responsibilities as full-time employees. The same goes for temporary help agency employees. The proposed legislation also calls for better opportunities to join unions, opportunities to care for family members over a longer period, 10 emergency leave days, as well as a 3-week paid vacation after a period of 5 years with the same employer. Fair scheduling rules have been proposed as well for on call and shift workers.
The Impact of the Proposed Legislation
Unemployment Levels
Experts warn that the minimum wage increase in Ontario will cause more unemployment, especially among low skilled workers and younger people as well as workers outside large cities such as Toronto. The wage increase will affect regions with considerably lower average wages, including Kingston-Pembroke, the Niagara Peninsula, the Stratford-Bruce Peninsula, Windsor-Sarnia, London, and others. Towns and areas that are economically weaker will be the most affected by the proposed reform. The reason is that unemployment levels tend to spike when the minimum wage reaches 45 percent of the average wage. In Ontario, however, the minimum wage will go over the 45 percent threshold to 55 percent. The pool of employment opportunities would shrink for young people, teenagers, and low skilled workers after three consecutive increases over a period of just 18 months. This is a 32 percent increase, which makes it the biggest, most significant, and steepest in the history of Ontario. In fact, during the last 50 years, the biggest increase has been less than 1 percent (0.75 percent).
As mentioned, low wage workers would be the most affected, including those working in the food, accommodation, and retail trade services. Other categories include people with less than a post-secondary diploma, those working two or more jobs, students, and persons under the age of 30. The same goes for casual, contract, temporary, and seasonal workers and those working for small businesses. Surprisingly, workers in large companies would be affected as well because of the introduction of new technologies that replace low cost labor.
Businesses and New Job Openings
The Liberal government is spending other people’s money by pushing to pass the new legislation, and the proposed measures would hurt Ontario’s economy. Former aviation executive at the John C Munro Hamilton International Airport Richard Koroscil, for example, explains that the wage increase would make it harder for businesses to expand and create more jobs. The Canadian Federation of Independent Businesses made a similar statement, warning that it will be more difficult for Businesses in Ontario to “shoulder additional financial burdens”.
While the reform proposal is still under discussion, the key points remain unchanged, one being the minimum wage increase. Businesses oppose the reform, especially those in the food service industry and independent owners. In their opinion, the new wage increase will slow job growth by reducing profit margins. Many argue that the reform would kill small businesses, which is also the view of Restaurants Canada. The new reform will cost restaurants an extra $47,000 a year, which means that some establishments would be forced to close down. Others, including the Canadian Federation of Independent Businesses, warn that the reform will result in significant job losses. Some establishments will cut hours while others will cut jobs. These are tough decisions to make. The problem is that a higher minimum wage is associated with higher costs, which many small businesses cannot afford. Businesses that can afford it may need time to adjust as well.
The Ontario Chamber of Commerce, which represents more than 60,000 businesses, opposes the reform as well. In the words of Richard Koroscil, the new measures will curb business growth and job creation. What is more, representatives of the Ontario Chamber of Commerce warn that the minimum wage increase will result in more than 180,000 jobs being lost over a 2-year period. Ontario’s Financial Accountability Office confirms this by pointing to the fact that a $15-wage would result in about 50,000 jobs being lost.
Women would be the most affected if the proposed increase passes this year. The reason is that the majority of low wage workers are actually women. Policy Director of the Chamber of Commerce Ashley Challinor explains that the new reform is not only going to make it more difficult to expand and employ people, but many businesses would be forced to rely on automation and speed up the deployment of robots. This means that jobs will be lost to robots and new technologies.
To add to this, businesses that pay more than the minimum worry that employees would expect significant pay increases. Many small businesses simply can’t afford it.
When it comes to exports, it looks that Canadian exporters have adopted successful strategies to remain competitive and adapt to appreciation. These include enhanced efficiency and productivity, the use of imported raw materials to reduce production costs, and expansion to new markets. Imported raw materials and other inputs, for example, help boost productivity and offset the negative effects of foreign exchange exposure. Export diversification is another successful strategy to adapt when the Canadian dollar is strong. In 2003, for example, many companies began to export goods and services to new markets. While in 2002 some 70 percent of exports went to the U.S., a year later this figure fell by whooping 14 percent. This means that the percentage of goods and services exports to emerging markets rose substantially and actually doubled. As a result of diversification strategies, exports to the European Union, the Middle East, and Asia rose in proportion. The reason why this strategy turned out successful is that the loonie does not appreciate equally against the Euro and other major currencies. Thus businesses enjoy better profit margins through diversification. Another strategy that Canadian exporters use is to establish sales and distribution offices when expanding to new markets. This is less expensive than maintaining production facilities abroad and fosters cooperation with new partners to increase after-sales. Many are working on joint projects as well. Finally, buying imported goods and services is another strategy to offset the negative effect of a strong loonie. This helps boost the purchasing power of manufacturers, and the reason is that imported components, parts, and raw materials are cheaper and help cut production costs. This strategy works well by increasing productivity through investments in advanced technology to reduce production and operational costs and eliminate waste.
Higher rates mean higher costs for Canadian financial institutions. Many worry that interest rate hikes will affect mortgage payments but this is not the case. With a rate increase from 1.7 percent to 1.9 percent on a $500,000 mortgage, borrowers pay about $40 more a month. A subsequent hike in interest rates is expected to have a similar effect. Even in this case, borrowers have the option to lock in their rates and opt for a fixed-rate mortgage loan. This is what many choose to do when interest rates rise. However, experts point out that a fixed-rate mortgage is a better option only if rates go up by 0.69 percent or more during the next couple of years. What we have seen so far is interest rates going up to 1 percent and then dropped by 0.5 percent over a 5-year period. With this in mind, a variable-rate mortgage with a low interest rate (i.e. 1.9 percent) makes more sense than a fixed-rate mortgage with a rate of about 2.6 percent. And according to Bank of Canada experts, subsequent rate hikes, if any, will be gradually implemented.
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