Big Government Often Begets Bigger Government

Commentary, Economy, Matthew Lau

Minimum wage hikes by provincial governments across Canada last year were sold as a policy to make life easier for workers. However, minimum wage advocates had overlooked some of the negative consequences of the policy, and are now prescribing yet more government interventions to remedy the problems caused by the minimum wage.

When the Ontario government hiked the minimum wage from $11.60 to $14.00 per hour in January 2018, one of the immediate effects was a huge increase in the prices of labour-intensive goods and services, such as child care.

Just two weeks after the $14.00 minimum wage came into effect, the CBC reported that “child-care costs increase due to minimum wage change… some parents [are] saying their fees have jumped by as much as 24 percent this month. This is despite a $12.7-million provincial fund to help daycare centres deal with the wage increase.”

Clearly, one of the negative effects of the minimum wage increase was a significant cost increase on families with young children, making their lives less affordable. The cause of rising child care fees was taken up in a recent paper from the left-wing think tank Canadian Centre for Policy Alternatives (CCPA).

Concluding from its survey that child care fees have risen faster than the inflation rate in most Canadian cities in 2018, the CCPA report called for more government intervention in the form of increased spending on child care.

However, nowhere did the report calling for more government intervention mention that the major cause of rising child care costs in 2018 was another government intervention in the first place – the minimum wage hike that the CCPA had also vigorously supported.

Importantly, when child care prices rise, fewer parents use child care services, resulting in fewer jobs for child care workers. The same is true for restaurants, retail shops, convenience stores, and so on. Higher prices driven by higher labour costs in all industries mean a lower quantity demanded of goods and services, which means workers lose jobs.

This inevitable effect of minimum wages on unemployment is a strong negative economic consequence that often provokes calls for more government intervention in the form of welfare programs to help those who have lost their jobs or skills training to boost workers’ employability. Much of the unemployment increase resulting from minimum wage hikes is among young workers.

According to a study in 2014 by economist Morley Gunderson for a government-sponsored Ontario think tank, “the Canadian evidence is more in agreement, with the recent evidence based on different data sets and methodologies generally finding that a 10 percent increase in the minimum wage reduces employment by about 3 to 6 percent for teens and slightly less for young adults.”

In order to remedy the problem of high youth unemployment, largely a result of provincial governments ratcheting up the minimum wage, the federal government spends hundreds of millions of dollars in subsidies each year through the Canada Summer Jobs Program.

Child care spending, additional programs to help the unemployed, summer job subsidies for youth – these are just three examples of government interventions that are designed to counteract the economic problems caused at least in part by minimum wage hikes. Yet these additional government interventions create their own problems. Higher spending means higher taxes, which reduces business investment and slows economic growth.

Instead of layering government interventions on top of each other in an attempt to remedy economic problems created by other government interventions, policymakers ought to look for economic solutions that involve scaling back the role of government, since interventionist policies are often the root of economic problems to begin with.