With a $15 minimum wage, Ontario enters dangerous and uncharted waters

Premier Wynne’s government plans to increase Ontario’s minimum wage to $15 per hour by 2019—a remarkable 32 per cent increase in just 18 months.

Unfortunately, this policy will make it harder for Ontario’s young and less-skilled (the primary demographic of minimum wage earners) to find work, as many will be priced out of the labour market. If a person’s labour can’t produce $15 worth of value for an employer, it will be increasingly difficult for that person to find work.

Just how serious a problem will these negative employment effects in Ontario be? It’s difficult to say for certain, because there are so few recent historical examples of comparably rapid minimum wage hikes to analyze. However, job losses may be substantial.

Here’s why. When the minimum wage is low relative to the median wage (the mid-point in the hourly wage where half of workers earn above this point and half below), there’s only a small effect on job loss. That’s because any changes to the minimum wage will affect very few workers. But as the minimum wage increases relative to the median wage, it affects more and more workers and the negative economic effects grow more severe.

In Canada’s four largest provinces (Quebec, Ontario, Alberta and British Columbia), the minimum wage is almost exactly half the median wage.

But with a $15 minimum wage, Ontario is set to skyrocket beyond the prevailing norms. In 2019, we estimate that a $15 minimum wage will be equal to 64 per cent of the province’s median wage, generating the risk of substantial job losses.

While Alberta is also heading toward a $15 minimum wage that same year, Alberta has a much higher median wage. Its minimum wage will be equal to 58 per cent of its median, which is above current Canadian norms, but nowhere near as high as Ontario’s.

In fact, in 2019 Ontario will have, by far, the highest minimum wage in Canada relative to its median.

A $15 minimum wage will also make Ontario an outlier relative to key U.S. states with whom it competes for investment. Pennsylvania, Indiana, Illinois, New York, Ohio and Michigan all have state-wide minimum wages that are either close or well below 50 per cent of their median wage levels. Crucially, Ontario’s uniquely high minimum wage will put our province at a competitive disadvantage in the region when trying to attract investment from industries that employ large numbers of young and less-skilled workers.

In short, the Wynne government’s planned minimum wage hikes run the risk of increasing the wage floor beyond what the market can reasonably bear. This will create stronger incentives for firms to either automate more jobs, hire fewer staff or, in the worst case, close up shop entirely if they cannot be profitable under the new regulation.

The Canadian evidence is clear—higher minimum wages tend to reduce employment opportunities for younger and less-skilled workers. Those risks become more severe as the minimum wage rises higher relative to the median wage in the economy, which should be a big concern to Ontarians as the province enters uncharted waters with its rapid rise to a $15 minimum wage.