Canadian Commentary: Economics

McWages, McJobs, McIdeas

September 1997

The Globe and Mail's editorial writers have picked up on an op-ed piece about employment policy that appeared in their newspaper during the summer (July 12), written by Lawrence Solomon (neo-conservative editor of the magazine The Next City). The argument of the piece, and the copycat editorials, was as follows: economic theory claims that minimum wages reduce employment. Canada should reduce the minimum wage, and compensate low-wage earners by reducing taxation on low wages (with the upcoming budget surplus). This will increase employment.

This argument is misguided in so many ways that it is difficult to know where to start. So as not to get caught up in tangents, I will concentrate on the basic flaws. (Solomon's article claimed that the minimum wage "outlaws low-paying jobs" - as if the minimum wage, barely enough to live on, is not low pay! This shows just how out of touch with reality Solomon is.)

In fact, a number of recent economic studies of minimum wages in the real world have shown that minimum wages have little or no effect on employment levels (as long as they remain below a certain level, which Canada's minimum wages are well within). The presence of a minimum wage, or increasing it, does not actually increase unemployment; abolishing or reducing the minimum wage does not reduce unemployment. This is one of those many areas where the number-crunching theories of economics have nothing to do with the way the real world works.

So, if the money companies saved by a reduced minimum wage did not go towards hiring more workers, where would it go? Why, to their corporate balance sheets, of course. As their payroll expenses were reduced, their profits would go up. The proposal is in fact nothing more than a subtle way of directing the budgetary surplus to the corporate sector, while disguising the process in progressive colours.

So, here's a better idea: reduce taxation for low-income earners [see my proposals for the surplus], while keeping the minimum wage at its present level. What would be the effect of this policy? Why, the budgetary surplus would go to those Canadians who most needed it. Furthermore, people on low incomes are those who would spend new money immediately, on basic necessities (food, clothing, shelter) largely produced and sold in Canada. The money would be promptly recycled into the economy - resulting in more domestic consumption, more rapid growth and, what do you know, MORE JOBS. Furthermore, this would increase the differential between work income and social support - creating added incentive for people to find jobs rather than rely on welfare.

The Globe also picked up some other dumb ideas from Solomon's article. The paper claims, for instance, that excessive workplace regulation prevents low-skill workers from entering the workforce - suggesting taxi driving, street vending and hairdressing as possible options. From the taxi drivers and street vendors I've seen, I'd say that plenty of low-skill workers are getting into these professions without any problems. But leaving that aside, this shows just how little these editorial writers understand about the way an economy works. They claim that a "surly taxi driver or a bad haircut is a temporary annoyance" (presumably the Globe's editorial writers have never had a bad haircut, or wouldn't know one if they saw one, because they certainly aren't temporary). In fact, these "annoyances" are much more than that. If there are no standards for such basic services, consumers must waste vast amounts of time (and therefore money) trying to sift through the choices to find ones that are acceptable, and spend much time and money repairing damage from a job badly done. Who the hell wants to have to check the license of each taxi driver they hail to make sure they're not going to die as a result of bad driving? No, if you use a taxi, you need to expect a basic level of safety and competence, and that is what regulations ensure. [For an example of what happens when you deregulate taxis, see the taxis of Prague]

This approach also ignores the broader implications of a non-regulated economy. Toronto already suffers a reputation for bad taxis, which has a negative impact on its economic appeal in areas such as tourism and conventions. What these no-regulation proposals basically lead to is a third-world city, where there is no way of knowing whether your taxi will get lost, cheat you, or get you into an accident, and where the streets are crowded with vendors, some of whose products are defective or will make you very ill. Business avoids these cities because they are dangerous, stressful, time-consuming and unattractive places to operate. Canadians have gone through a lot of trouble to regulate their society so that it is in fact a place that people will want to live and work in - and this is what attracts the businesses which give us one of the most prosperous economies on the globe.

The last word goes to the former leader of the Labour party in Britain who pointed out that, if low wages and low regulation led to prosperity, Bangladesh would be one of the richest countries in the world.

[Curiously, an article about computer games in the Globe recently noted that Solomon had banned the playing of Solitaire by his employees. Which suggests that he does not practice what he preaches when it comes to petty regulations.]

Sept. 17, 1997

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