Grigoriadis

Empirical evidence shows that small businesses will adjust to wage hike: Economist

Canadian economist Michal Rozworski says economy won’t be adversely impacted by higher minimum wage

Gus Grigoriadis has been paying his employees $15 per hour since opening Phyllos Café in Toronto’s Pape Village in the summer of 2017.

Although the proposed minimum wage won’t be raised to $15 until Jan. 2019 now that Bill 148 has passed in the Ontario legislature in November, he feels his staff deserves to be paid well considering Toronto’s prohibitive living costs.

In fact, Grigoriadis – who supports Bill 148 – realizes even $15 an hour isn’t enough.

“Let’s just say they make $500 a week (on $15 an hour after deductions),” he says. “That’s $2,000 a month. You know how much an apartment is to rent over here? It’s $1,500, $1,600 a month. So what you got left over?”

But Grigoriadis is unsure whether his business will take off, and hence has kept his lowest paid staff at a $15 base pay.

A living wage in Toronto

According to the Canadian Centre for Policy Alternatives, the living wage in Toronto in 2015 was $18.52 an hour– for a family of four with two working adults.

The CCPA report is based on a detailed list of (mostly essential) expenses, but doesn’t take allow for savings.

Source: Canadian Centre for Policy Alternatives

Grigoriadis’s sentiments align with the 62 per cent of small and medium-sized business owners who favour the Ontario government’s move to raise minimum wage, as shown by a Campaign Research poll from June 2017 (pg. 11). Of those, 15 per cent said that the wage hike was “too little.”

Newer economic models show negligible adverse effects: economist 

The argument for a higher minimum wage has often been characterized as a moral one,  but according to Canadian economist Michal Rozworski, the change is also good business. 

Rozworski, a research analyst at the Ontario Confederation of University Faculty Associations, says he wouldn’t comment on the experiences of individual businesses.

However, he says, research using new methodologies shows that the costs and benefits more than even out for the economy in the aggregate in response to wage increases.

“When we look at it empirically, and look at what actually happens, most studies find an effect that’s either very small or indistinguishable from zero (in respect to unemployment), especially for adults,” he says. “(Though) there is still potentially some small negative effect for teenagers.”

Rozworski, who is one of the 53 Canadian economists who endorsed a $15 minimum wage this June, says that opponents of a higher minimum wage often rely on outdated economic models.

Studies by the Canadian Centre for Economic Analysis and TD Bank have estimated potential job losses ranging from 90,000 to 185,000.

But Rozworski says that “cutting-edge” economic studies show do not show such negative consequences. He says that is possibly because with higher wages, workers are happier and more productive, leading to lower recruitment and training costs.

“One of the reasons people have theorized (for why impact on employment is negligible) is because you have a shift from a low-wage, high turnover, crappy job regime to a higher-wage, lower turnover, better job regime,” Rozworski says.

This argument complements economists’ assertions – including Rozworski’s – that raising minimum wage would stimulate the economy, as low-wage workers would be able to buy more products and services.

Qualified opposition to the bill

Laleh Larijani, co-owner of Forno Cultura, restaurant and bakery on King St. W, has a similar viewpoint – although she doesn’t think Bill 148 is a good idea.

“We actually have been paying people way above minimum wage,” says Larijani. “Because at a minimum wage, which is now $11.50, currently if you think about rent, if you think about healthcare, if you think of what independent living is like, that is simply not enough – not even at 40 hours (a week).”

Although most of the 65 people employed at Forno Cultura including professional bakers and chefs earn above $15, about 20 per cent of the workforce is comprised of seasonal workers and students, says Larijani.

The latter get paid above minimum wage but less than $15. She wouldn’t disclose the exact amount.

Larijani also offers medical benefits to her workers. Although it cuts into her profits, she feels that the business benefits from having a satisfied workforce.

But she’s concerned over the proposed 30 per cent wage hike, which she believes will be disastrous for the restaurant industry, where margins are “razor-thin.”

“I believe in what it’s trying to accomplish though it’s hard work for us on this end to try to make ends meet,” Larijani says of Bill 148.

“And I think it’s for all small businesses, it’s hard work to try to make your business sustainable and viable. Maybe a bigger corporation has more to play with, but for a small business in (the) food (industry), it’s always hard.”

Relief for small businesses

In November, Finance Minister Charles Sousa announced a relief package for small businesses to offset the impact of higher wage costs. Businesses will pay 3.5 per cent tax on their first $500,000 of profit from Jan. 1, 2018, instead of the current 4.5 per cent.

While the business lobby including the Ontario Chamber of Commerce had lobbied for a relief package for small businesses, Rozworski is not in favor of it.

Rozworski says that small businesses are accustomed to a range of economic shocks, such as fluctuations in oil prices to rent increases, and will adapt in this case as well.

“Given the economic evidence, and given what we know about how these increases can be absorbed, this is a one-time jump in costs,” he says.

Rozworski also says that the tax regime in Canada has also been “quite friendly to small businesses.”

“There is a danger if you turn around and make too big a concession,” he says. “Then you could have a disproportionate reaction that will end up costing the budget and overcompensating for an increase in costs but one that is not so unprecedented.”

Big businesses more likely to have low-wage jobs

Although concerns continue to be raised about the impact of higher minimum-wage jobs on small businesses, the 15 and Fairness campaign cites research from Social Planning Toronto showing that it’s the large businesses who mainly employ low-wage labour.

From 1999 to 2013, the share of minimum wage workers in large firms in Ontario went to 30.2 per cent from 12.6 per cent. For small businesses, the percentage went up to 5.6 from 4.1, according to the SPT report.

As the table below shows, the 30.2% employees earning minimum wage at large businesses amounted to 254,800 people in Ontario in 2013. And based on the trend since 1999, that number is sharply growing.

Employees Earning Adult Minimum Wage in Ontario by Firm Size 1998 to 2013 (annual averages, in thousands)

Firm Size 1998 2013 Percentage Change
Small (1 to 99 employees) 124.3 207.3 66.8%
Medium (100 to 500 employees) 30.9 56.5 82.8%
Large (More than 500 employees) 87.4 254.8 191.5%

Source: Social Planning Toronto

The numbers appear to reflect a chasm in the way small and large businesses operate.

“I think they deserve that money because they can’t afford to live on $12 an hour,” Grigoriadis says.

“They know, Sobeys knows, Loblaws knows – but the bottom line, who’s going to make the money? That’s how they think. I don’t think like that. I am not greedy. As long as you can live nice and comfortable, let them live too.”

“(But) maybe I’m not a shrewd businessman,” he adds with a smile.

The Ontario Chamber of Commerce did not respond to questions by deadline.

The consensus among Canadian economists

In June, 53 Canadian economists released a statement, endorsing a $15 minimum wage. Following are some of the salient points they made:

– Ontario’s current inflation-adjusted minimum wage is only a dollar above its value in 1977. In the meantime, productivity has gone up by 40%
– 600 US-based economists including seven Nobel Prize winners, recommended that government raise the federal minimum wage by a percentage increase higher than the one proposed in Ontario.
– There is no consensus among economists against increasing minimum wage as there is one for raising it.
– Raising the minimum wage could boost aggregate demand and revitalize the economy
– “Using improved techniques that carefully isolate the effects of minimum wage increases from the remaining noise in economic data, the weight of evidence from the United States points to job loss effects that are statistically indistinguishable from zero.”
– “The few very recent studies from Canada that have used these new economic methods agree, finding job loss effects for teenagers smaller by half than those of earlier studies and no effect for workers over 25.”
– “There is no instantaneous, automatic mechanism between higher labour costs and higher prices.”

Source: http://www.progressive-economics.ca/2017/06/29/economists-support-15-minimum-wage-in-ontario/