Minimum wage costs unskilled workers

Throughout the Liberal leadership campaign, Christy Clark threatened to “unleash the power of Families First” on the B.C. economy. Nobody, besides Clark, really knew what that meant, but Wednesday afternoon we found out. Clark ran as a Liberal, and that is what she is proving to be.

Throughout the Liberal leadership campaign, Christy Clark threatened to “unleash the power of Families First” on the B.C. economy. Nobody, besides Clark, really knew what that meant, but Wednesday afternoon we found out. Clark ran as a Liberal, and that is what she is proving to be.

Clark’s notion of “Families First”, and presumably that of her newly minted cabinet is to create an economic environment in which some members of many families will not be able to get a job. The idea that increased structural unemployment for students, part-timers and new Canadians, particularly those with limited job and language skills, somehow puts “families first” is a stretch. As a result of Clark’s minimum wage increase, the first place many family members will go is the EI office.

Advocates for minimum wage laws, and particularly those who want an increased minimum wage, while well intentioned, ignore the negative consequences their actions have on entry-level and skills-challenged workers. When government policy impairs the ability of any market, whether a market for goods, like energy, or a market for labour such as the entry-level job market, people — which is all a business is — react predictably.

Mandating a “minimum” wage level guarantees that some people will never get a job — because the minimum wage mandated removes, by law, the one bargaining chip the skills-challenged worker has to secure employment — price.

By removing an individual’s opportunity to compete for a job on the basis of price or wage, the government is in effect encouraging the business to discriminate against the low-skilled worker. There is no economic penalty to a business for this discrimination, thus rewarding the business to not hire the unskilled. In fact, the business would be breaking the law to hire the employee at the “market” price.

Clark’s “Families First” wage policy will raise the minimum wage nearly 28 per cent in about 13 months. Nobody in this economy has received a 28 per cent raise in one year. Clark boasts her new minimum wage will “put an additional $4,000 annually” in the pocket of the minimum wage worker. Assuming the worker is still employed, which is unlikely.

While $4,000 more sounds good to the progressive/left of the BC Liberals, it is a huge drag on business’s ability to operate profitably. A business with 25 employees at minimum wage today, will be faced with an additional labour cost of $100,000 in wages as of May 1, 2012. Include basic benefits, EI, CPP and other expenses, and the total increase will be closer to $120,000 annually for the business.

Many businesses with 25 employees will have gross sales around $3 million annually, and hope to achieve pre-tax operating margins of 10 per cent, or $300,000. Income taxes will reduce that to around $225,000 for a “small business”. This is not the bank balance at year end, but an accounting entry. Business owners will typically borrow against this profit to invest in new equipment, markets and people. But not as of May 1, 2012 — or sooner.

Adding a total of $120,000 of labour expense reduces our sample business’s profit to $105,000. The owner has a few choices to maintain profitability. They can raises prices they charge for goods and services, which is easier said than done, they can cut costs, or they can do a little of both. Or they can scale back operations and hope to get back to 10 per cent profit. The quickest and most likely response to Clark’s wage increase will be a reduction in the minimum wage labour force. Business will automate as much as possible to replace workers. Business will reduce hours for existing employees. Business will look to hire and retain only skilled and experienced workers who earn more than minimum wage. Business will relocate operations to Alberta or other “friendlier” places.

Business will not hire additional workers, or retain some existing workers, whose jobs were worth $8 an hour in 2011 but will suddenly be worth $10.25 an hour in 2012, just because Clark says so.

The unintended consequence of Clark’s keystone labour policy will ensure the unskilled, inexperienced and youth workers will be underemployed for the foreseeable future. Clark’s minimum wage policy encourages business to replace workers with machines wherever possible. Clark’s minimum wage policy rewards business to move as many operations as possible out of province. Clark’s minimum wage policy will encourage an “under the table” labour pool, whose members will have none of the protections or benefits afforded the legitimate employee. The unintended consequence of Clark’s “Family First” policy is structural underemployment and a slow down in economic activity.

One wonders if Clark believes she ought to be able to set the price of labour, what other prices does think she ought to set to put “Families First”? That sucking sound you hear is the air coming out of the balloon of B.C.’s fragile economic recovery, and the wind at the back of Clark’s rivals on the right.

 

 

 

Mark Walker is the publisher of the Penticton Western News.