Friday, April 2, 2010

Raising the minimum wage (Part 1)

Ontario's minimum wage increased as of March 31st, 2010. The general minimum wage increased from $9.50 to $10.25 per hour and so were several other wage categories clearly posted on this website. On the same day an article in the Globe & Mail by Jim Stanford (CAW) outlines his thoughts as to why this increase was "a reason to celebrate". On the surface it seems that this action by the McGuinty Liberal government was designed to assist the working poor and raise their living standard. But all economic actions have at least two sides and this action bears some close scrutiny.
In an unfettered market, wages and salaries are calculated by employers on the basis of the employees productivity. Productivity is a measure of the employee's output, and for a business to succeed, that output must be greater than the price of the employee (wages) and  all of the support costs that allow the employee to be productive. The difference is profit, and maximizing profit is the goal. Employees that achieve that goal, deserve a fair wage, and in a competitive market their skills can be shopped around to the highest bidder. Every employee has a price (wage level), usually commensurate with their talent, skill and experience. As these increase, the employee becomes more valuable and in an unfettered market the employee can demand a greater price - to a point.
When a government steps into the market and arbitrarily raises wages (across the economy) , it does so by ignoring productivity. The government only looks at one side (employee) of the economic equation. The link between the price of labour and the price of good and services is irrelevant to the government action. In fact the government assumes that employers will somehow absorb the added cost. What if the employer passes on the cost by increasing the price of their goods or services? What if this happens throughout the economy? The costs are passed on and prices for goods and services increase. Does this benefit employees? I think, eventually they are back to where they were in terms of living standard. Am I wrong? (Part 2, later).       

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