Why a hike in Ontario’s minimum wage will satisfy no one

Earlier this week, the Ontario government announced released its Minimum Wage Advisory Panel’s report and recommendation. One of the big takeaways of the report was that the minimum wage should be tied to Ontario’s rate of inflation. This morning, the province took this advice by raising the minimum wage to $11 an hour, effective June 1, 2014.

The government arrived at the $11 figure by adjusting the current minimum wage for the accumulated level of inflation between 2010 (when the minimum wage was last increased) and now. This calculation provides a minimum wage in the range of $10.90; the government then rounded up to $11.  This is far from an ideal process, as it presupposes that the minimum wage was at the optimal level in 2010.  Given how little we know about the minimum wage, it would be surprising if the government got it right four years ago.

Unusually, the government’s decision is one of those rare cases in which a less than ideal process provided a great answer.

Based on what we know about the minimum wage, I have estimated that Ontario can raise it to $11.25 before there are significant labour market effects. The two figures are close enough that I support the government’s increase to $11, despite my misgivings at the process which provided their answer.

This announcement is likely to please almost no one. The Ontario government was in a tough spot, with some business groups claiming, without a great deal of evidence, that even a small increase in the minimum wage is likely to cause widespread unemployment.

On the other hand, advocates of a $14/hr minimum wage refuse to acknowledge that there can ever be a trade-off between the minimum wage and employment or hours worked and the minimum wage can be raised indefinitely without consequence. Both positions are almost certainly incorrect. But as with too many areas, supporters of evidence-based policy are drowned out by groups espousing hard-line ideological positions.