Higher Minimum Wage is Not the Answer

In a world where automated technology is quickly becoming a realistic replacement to people, a higher minimum wage may only quicken job loss in a system not ready to help those affected.

I know this might seem like an unpopular opinion, and I might be naive in my understanding of how the world works, but I want to share my thoughts on the subject and ask you to read to the end before you comment.

Employment Situation

Recently, the job numbers for October were released in Canada, and the media is trying to spin the numbers as a positive thing as we had a net increase of nearly 44,000 jobs. Of course, this is only part of the picture. Canada lost 23,000 full-time jobs and gained 67,000 part-time ones. I think it is horrible that we are seeing a gutting of full-time employment in Canada and so many part-time jobs being added to the mix. This kind of issue does make a higher minimum wage seem like it would do good in allowing those with part-time employment to better afford a reasonable life, but what if the increases in minimum wage are partly contributing to the shift in employment strategies for businesses?

Minimum wage in Ontario is now $11.40 per hour. There is a group, just like being promoted during the election in the USA that believes the minimum wage should be $15.00 per hour. When I graduated high school, the minimum wage was around $6.85 per hour1, and when adjusted for inflation, that is around $9 per hour in today’s money2. I would expect that someone making $11.40 per hour would be in a better financial position today than I was back in 2001, but that’s not what I’m seeing in my peer circles and via my extended family. So many important things have outpaced inflation and certain products and services that were a nice-to-have fifteen years ago are a requirement today to be competitive in today’s job market.

Unfortunately, the problem I have with an increasing minimum wage is the potential feedback loop that occurs.

Many of the things I’m going to say next are huge generalizations, partly because my understanding of economics and business isn’t as deep as I’d like, and partly because I don’t want to write a thirty-page thesis to go through all of this.

When you increase the minimum wage, you impact the cost of goods and services because one of the largest costs built into products today is related to wages and other secondary benefits3.

In Ontario, a part-time employee doesn’t typically get health benefits, paid sick days, accrue vacation, or receive any sort of retirement related benefits. Most full-time positions receive some, if not all, of those additions, increasing the cost of adding a staff member by a noticeable amount. How can we have cheap products and services if salaries start at $15 per hour? Employees in entry-level positions, fresh out of school, can only be so productive, especially when they are first starting out.

Globalization

With the global marketplace that we now live in, even our current $11.40 minimum wage starts to look expensive to corporations operating within our province. In the Philippines, the minimum wage is equivalent to $13.26, not per hour… but per day!4

What the majority of people don’t seem to consider when fighting for a $15 minimum wage is what that means for a yearly salary and how that compares to the other options that are available.

Let’s say that a full-time employee works around 1800 hours per year which is 37.5 hours per week for 48 weeks of work. There are reports that say we typically work less than that5. With an hourly rate of $11.40 per hour, that’s $20,520 per year. The poverty line in Ontario is around $23,000 per year6.

My reaction to this, as is likely yours, is, “someone working full time should not be earning below the poverty line!”

But for that same price you could hire around five or six full-time employees in the Philippines earning a median wage7. Did I mention that the Philippines isn’t even the cheapest location to outsource work to? There are countries like Cambodia that typically cost less than half as much per full-time employee.

You might be thinking that you don’t have to compete with people in other countries, but that’s probably because you are either over 40 years old or more naive than I. We live in a world with an information superhighway called the Internet and businesses are primarily concerned with increasing their profit margins.

Eventually, much like we are already seeing in China, countries and the people in them will want to have a better lifestyle much more like we have here in Canada and of course the one they see thanks to the prevalence of US media, and it will become less of a business advantage to ship production to other countries, but those jobs won’t come back to us.

Automation

What we are already seeing major companies do, rather than moving from China to cheaper locations, is to move to robotic manufacturing.

When most people think of robots building things, they think of the old school machines that could only do one specific job over and over. The machines were difficult to program, only usable in narrow situations, and were expensive.

Today we are just starting towards more general purpose machines that will replace people faster than ever. An example of this is Baxter.

Currently, a machine like Baxter costs around $35,000 or just less than two years of a current minimum wage worker. But Baxter doesn’t need breaks, vacation, benefits, or retirement packages. If Baxter works an average of 20 hours per day, 350 days per year, then its hourly direct cost (not including electricity and repairs) is only $5 per hour.

Now consider how appealing hiring human staff looks at $15 per hour. You can basically afford three Baxter robots for every human.

This is just one example happening in manufacturing. You are probably thinking your job can’t be replaced by a machine, but we are seeing employment be replaced everywhere, especially in entry level positions where minimum wage would be compared to these machines.

IBM’s Watson is helping plan out treatments for cancer patients8 as well as helping with the automation of transportation planning9.

Basic Income

I’ve been happy to see more conversations about Basic Income. There is even a pilot project being planned in Ontario10. I am a fan of the idea of Basic Income. I don’t know how it will change the society we live in, but I do feel that Basic Income is only part of the answer.

Creating a system where people can’t fall below the poverty line is an important transition that we need to make as a species, not just as individual countries, and I don’t think that Basic Income will work without all countries entering it and the full support of automation.

Basic Income is a delay tactic. It allows the widening class divide between the rich and poor to continue longer by removing some of the discomforts from the poorer class so that they don’t revolt against the rich. That is, in my mind, why some richer people have spoken out positively about basic income. The wealthy know that if the government doesn’t tend to the masses soon, they will be the target of frustration and uprising.

Eventually, we will have to transition to a post-capitalism system. Even if automation reduces the costs of goods and services where each thing is no more than a dollar, the pay, taxes, and Basic Income would all be tied to those costs, creating an unchanging system where the rich, due to their ownership of the automated technology and wide distribution of their inexpensive products, are still afforded a dream lifestyle that the majority can never earn.

Solution?

If $15 minimum wage isn’t the silver bullet that people are hoping for and Basic Income is only a stop-gap measure, then what’s is the solution?

The solution for Canadians is very complex and things might get worse before they get better. We might have to have a few generations get used to the idea of a slightly lower quality of life, and we may need government intervention to create a more equitable system so that we reduce the number of people suffering. I think Basic Income is a positive stop-gap measure while we invest heavily in automation. I think that the government needs to also invest more in small business and other potential loss leading opportunities in expanding healthcare and education funding so that we create a relatively satisfied group of people.

I think the world that our parents and grandparents grew up in is over. I don’t think my generation or the one coming after me is going to have it easy. If you know of people that lived through the great depression, ask how they survived, and learn from them. Grow your own food, live simply, and remember that the lottery is a voluntary tax and not a retirement program.

Fighting for a higher minimum wage is likely to convince businesses to move to automation faster, and if our government can’t keep up with the change, a whole generation of people are going to suffer and the road to a comfortable life without frustration and anger will only be farther away.

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