$15 minimum wage would be bad for the Atlantic Provinces

By Henry Gray (AIMS on Campus Student Fellow) 

Growing up in New Brunswick, the local McDonald’s provided a perfect entry into the labour market and an excellent way to begin to earn income for myself to save up for university. My job at McDonald’s taught me general, transferable skills to prepare for a career: work ethic, time management, teamwork, and customer service. As eager as I was at 14, the majority of my spare time was occupied by personal endeavours such as listening to indie music, and most of my mental energy at work to thinking up ideas for songs to write. Many of my colleagues were well worth the wage, but my efforts were not worth much more than the $9 an hour the province mandated that my employer pay. Certainly not the $15 an hour rate that minimum wage workers in Alberta are slated to enjoy as of October 2018.

 

So what would have happened to me had New Brunswick set the minimum wage at $15 while working at my local McDonald’s? In the best-case scenario, I would have been paid $15 an hour for singing between serving customers at the cash register. In the worst-case and far more likely scenario, and indeed this has been the reality for many minimum wage workers, I would have been out of a job.

 

As Matthew Lau and Marco Navarro-Génie discovered in their paper “Revisiting the Minimum Wage in Atlantic Canada” (2017), minimum wages, which have only gone up over the past several years and are slated to continue to do so, hamper the ability of young people to gain employment and to acquire employable skills.

 

The Atlantic Provinces hold the dubious distinction of having the most people per capita at or near the minimum wage in Canada. This is indicative of a weak economy, and the result of raising the minimum wage will thus be felt most severely here. While labour unions and anti-poverty activists have been known to suggest that raising the minimum wage will help unskilled workers and the poor, this policy will, in fact, disenfranchise and marginalize them even further. Some members of this already vulnerable population may be subject to the loss of their jobs, as their employers may not be able to afford to keep them on at an artificially inflated wage, while others may be prevented from entering the labour force altogether if their labour is worth anything under $15 an hour. To be certain, those who keep their jobs will be making more money, but for those who do not make the cut, a minimum wage hike represents unemployment rather than a pay rise. Moreover, my former employer, McDonald’s, has produced out self-serve kiosks, part of a trend towards automation that will only grow more widespread as minimum wage hikes drag labour costs upward.

 

Rather than reducing income inequality and empowering marginalized people, the minimum wage actually hurts those it is intended to help. It increases unemployment among the lowest skilled members of society, leads to greater demand for government welfare spending, and causes economic growth to falter, leading to less economic opportunity for all.

 

As Lau and Navarro-Génie recommend, provincial governments would see far better results by reducing the barriers to employment, raising the basic tax exemption, and unleashing the private sector to allow it to create jobs and wealth.

 

Legislating further increases to the minimum wage would actually further increase youth unemployment and exclude many unskilled workers and those in a lower socio-economic class from the labour force. Young people in Atlantic Canada are far better off given economic opportunity to better themselves, to learn skills that can be further developed later, to learn how to manage money, and to contribute to the economy.

 

The Moral Hazard of Current Employment Insurance

By Ainslie Pierrynowski (AIMS on Campus Student Fellow)

Employment Insurance (EI) was created with the best of intentions in mind. Launched in 1941, the program provided temporary benefits to the poorest workers. Over the years, EI has evolved and expanded, becoming Canada’s main source of relief for displaced workers as of 2013. Yet, in Atlantic Canada, EI has coupled with seasonality to produce dire consequences for the region’s economy.

These effects can be traced back to the EI reforms which took place in the 1970’s. As AIMS author Justin Hatherly recounts in this policy paper, the 1971 Unemployment Insurance Act rendered EI eligibility criteria less stringent. Further, in 1977, Canada’s provinces and territories were divided into EI economic regions. The higher the unemployment rate in one’s EI region, the fewer insurable hours are needed to qualify for EI benefits and the longer these benefits can be received. Due to these changes, workers in Atlantic Canada today receive a substantial percentage of EI benefits relative to the percentage of covered workers in the region. Not coincidentally, according to Andrew Sharpe and Jeremy Smith of the Centre for the Study of Living Standard, Atlantic Canada had the highest employment seasonality rate in the country throughout the period 1976-2003. In fact, while Atlantic Canada only accounted for 11.1% Canada’s total unemployment during this time period, it encompassed 20.9% of Canada’s total seasonal unemployment. While Atlantic Canada may have a high concentration of seasonal industries relative to the rest of the country, EI in its current incarnation has played a major role in seasonal unemployment’s current prevalence—and persistence—in Atlantic Canada.

In particular, EI benefits may serve to incentivize workers to pursue part-time, seasonal work rather than full-time, but seemingly less lucrative, jobs. For instance, Sharpe and Smith note that the lack of full-time work in Atlantic Canada could partially stem from the practice of firms with full-year operations hiring seasonal employees that only work long enough to attain EI benefits. The resulting seasonal unemployment problem, in turn, has an adverse economic impact on the region. With a population that is both aging and in decline, but which relies increasingly on public services—thus fewer and fewer individuals are burdened with paying for these services—the dual issue of seasonal unemployment and EI hints at an approaching financial tipping point. Moreover, numerous small and medium-sized enterprises (SMEs) in Atlantic Canada have voiced concern over the labour shortage in Atlantic Canada—and its possible connection to EI. Indeed, 31% of SME owners in Atlantic Canada asserted that they felt as if they were “competing” with the EI system for employees (compared to 33% who stated the contrary and 36% who reported being unsure), while 27% contended that employees had requested to be laid off in order to collect EI benefits. Further, as Hatherly notes, whereas labour mobility in a healthy labour market can eventually cause regional differences in unemployment rates to dissipate, the regional nature of EI benefits may deter seasonal workers from migrating to more productive areas and thus entrench the unemployment disparity between Atlantic Canada and the remainder of the country.

Thus while it provides much-needed relief to unemployed workers, the EI program as it exists today underpins Atlantic Canada’s seasonal unemployment problem. When it comes to combatting the underlying causes of seasonal unemployment in Atlantic Canada, the path forward is fraught with difficulties. Attempts to dial back EI benefits may be met with resistance from Atlantic Canadians who rely on the program, as shown by the unpopularity of the Chrétien government’s Employment Insurance Act, which mandated stricter entry requirements for EI and reduced certain benefits, in many Atlantic Canadian ridings. Meanwhile, a Canadian Federation of Independent Business report found that of the Atlantic Canadian seasonal SMEs which attempted to extend their seasons, the vast majority were unsuccessful. Hence, Atlantic Canada has found itself in a Catch-22, in that the region needs labour mobility, a diverse economy, and profitable full-time jobs to combat seasonal unemployment and dependence on EI, yet the EI program serves to disincentivize attaining these very needs. As one Atlantic Canadian well-drilling entrepreneur attested, “We cannot get trained workers; I have been looking for trained, licensed, workers for our industry for four years without success.” In light of the evidence presented here, an EI program with benefits tied to pursuing human capital—the training, experience, education, and skills needed to create a diverse, productive economy—rather than the region where one lives would push Atlantic Canada further to meeting these needs, grant unemployed workers support and security, and avoid falling victim to the moral hazard of the current EI system.

Uber, Economic Regulation, and the Open Market

In municipalities throughout Nova Scotia, as is the case across much of the Western world, local councilors are responsible for regulating the taxicab industry. This process primarily entails controlling prices and restricting licenses, as well as implementing safety regulations. Technological innovation, however, is changing the taxicab industry and governments have failed to heed the improvements brought by it.

Upon moving to Halifax in 2010, I noticed that taxicabs didn’t offer debiting services; in 2014, nearly every taxicab in the city provides this service. Halifax may be unlike other “big cities” in Canada, yet, technology available in Toronto, Montreal, and Vancouver is available here. To attract and retain consumers, i.e. riders, taxicab drivers must offer good services in return for the price they charge. In The Road to Serfdom, for instance, Friedrich Hayek argued, “Our freedom of choice in a competitive society rests on the fact that if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist, we are at his absolute mercy.”

The law of supply and demand suggests that the price for any given product will be variable until quantity demanded by consumers matches quantity supplied by producers, at which point there is equilibrium and all markets “clear.” This law does not apply strictly to the taxicab industry, where government controls the price of taxicab services and regulates the entry, and, therefore, “supply,” of drivers: restricting the supply of drivers creates excess demand for them, and this excess demand places upward pressure on the price of their services. Consumers, many of whom rely on taxicabs as their primary mode of transportation, absorb the rising costs of ineffective taxicab regulation.

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Taxicab drivers in Nova Scotia operate in a “non-market economy,” wherein government intervenes in the process of allocating goods and resources and determining their prices. This intervention creates a deadweight loss: “A buyer would be willing to buy the good at a price that the seller would be willing to accept, but such a transaction does not occur because it is forbidden by the quota.” Economic regulation of this type results in a net loss for consumers: “In every case in which the supply of a good is legally restricted, there is a wedge between the demand price of the quantity transacted and the supply price of the quantity transacted. This wedge has a special name: quota rent. It is the earnings that accrue to the [taxicab licensee] from ownership of a valuable commodity.”

In an open market, competition between drivers would place downward pressure on the price of their services and consumers would reap the benefits. Moreover, competition compels taxicab licensees to vie for consumers by offering better services, which results in a more robust and efficient market, whereas in the absence of market dynamism, the incentive to innovate is very low (or nonexistent).

Restrictive regulations in the taxicab industry, combined with the advent of technology, have resulted in emerging markets that fall outside the purview of economic regulation. Uber is a prime example.

Arriving in Halifax this past summer, the Chronicle Herald welcomed Uber with the headline, “Controversial Uber car service starts up in Halifax.” Uber provides a car-for-hire service similar to taxicab companies, however, its operations are unregulated due to “laws [that] weren’t written to account for technology that exists today.” One of the primary reasons that governments pursue economic regulation is to compensate for “information asymmetry,” but Uber provides a solution to this problem: it uses a rating system that gives consumers pertinent information about their driver. In other words, Uber is a product of competition and the company’s innovative model benefits drivers and riders. Perhaps it is time for governments across Nova Scotia to consider whether deregulating the taxicab industry and using a model similar to Uber’s would benefit consumers.

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies