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When the minimum is too much

By David Descôteaux

Raising the minimum wage may do more harm than good for those at the bottom of the income ladder.

Imagine you are the CEO of a small or medium-sized enterprise that employs minimum-wage workers. How would you react to news that the minimum wage would gradually increase to $15 an hour from $10 an hour?

At the office on Monday morning, your announcement might be something like this: “Good morning, staff. I have some good news and some bad news. The good news is you will be getting a 30% pay raise, thanks to a recent increase in the minimum wage by our political leaders. The bad news is I will have to gradually reduce everyone’s hours. If our small business is to remain profitable, total payroll can’t exceed a certain percentage of sales. And since sales haven’t increased by 30%, I can’t give you as many hours. I will therefore have to find another solution to cover the hours you no longer will be working. This is a frustrating situation for everyone, but it is not of our choosing.”

This is an aspect of “economics 101” that all those — increasingly vocal — proponents of a $15 minimum wage seem to forget.

Of course, workers who will keep their jobs after such a measure is introduced will be happy. But others, whose productivity or experience does not justify a $15-an-hour wage, will not. It is as though we are saying to these people, often students or inexperienced workers, “You no longer have the right to offer your services for less than $15 an hour.”

Now imagine a climb up the labour market ladder. Raising the minimum wage would effectively remove the first rung, which is the entry level to the job market where someone can gain his or her first work experience. To get on the ladder, workers will now have to climb onto a higher rung, one that anyone short on experience or skills is unable to reach.

So what would be a fair salary for people at the bottom of the ladder? Difficult to say. The market can determine wages much better than politicians can.

This so-called “invisible hand” was recently at play in the US. Titans such as Walmart, McDonald’s and Target announced increases in their base salaries for employees. Why? Because the big players are competing to attract and retain a quality labour force, which is in short supply.

And let’s not forget robots

Today, inexperienced and unqualified workers are facing another threat: robotization. Technological innovations are constantly improving and becoming less expensive. Now a company can replace employees who perform simple tasks with robots that will cost less in the long run. Automated cash registers in supermarkets are a good example, as are touch screens to purchase tickets for the movies while avoiding long lines.

Wages in fast-food chains represent close to a third of business costs. As a result, burger-flipping robots capable of cooking, preparing and wrapping a burger in seconds are increasingly becoming more attractive to bosses as alternatives to humans, especially when faced with a substantial minimum wage hike, as reported by the Washington Post last year.

We would all like to improve the lot of our fellow citizens and a significantly higher minimum wage is a step in the right direction.

But doubling the minimum wage (as some Americans would like), or raising it to $15 as proposed in Canada, may do more harm than good for those we are trying to help — those employees who are at the bottom of the ladder.

David Descôteaux is a Montreal-based business columnist.

This article was originally published in the August 2016 edition of CPA magazine.