More federal labour regulations mean fewer jobs

Most of the headlines from the Liberal budget were about the big dollar expenditures: tens of billions in new spending on child care, corporate welfare handouts (even excluding pandemic-related supports), student debt relief, climate change programs, Indigenous services, and much more. All this spending, by shifting economic control from the private sector to government, will reduce economic growth.

However, even when the Liberals aren’t spending more of taxpayers’ money, they are introducing other economically harmful policies. The budget includes, among other things, a new $15 per hour minimum wage for federally regulated workers and a commitment to strengthening “labour protection” for workers in the gig economy.

The problem with these sorts of employment regulations is that they discourage hiring by artificially inflating labour costs, and restrict the ability of workers and firms to design employment contracts in ways that maximize the total economic value created through employment.

For example, the $15 minimum wage effectively requires federally regulated employers to discriminate against low-skilled workers. It makes it impossible for federally regulated employers to offer jobs to any workers whose skills are insufficient for them to produce $15 of net output per hour, unless those employers want to lose money. The certain result of the policy is therefore to reduce job opportunities for low-skilled workers.

Some minimum wage advocates claim that minimum wages don’t kill jobs, but they are contradicted by the vast majority of empirical studies. Moreover, the downward-sloping demand curve – which says that if you raise the price of something, people will buy less of it – is a foundational idea of economics, and it makes no logical sense to say that it doesn’t apply to labour.

Importantly, even many of the workers who see their wages rise when the minimum wage is increased would be worse off. Suppose, for example, that an employer pays a worker $16 per hour: $14 in wages and $2 worth of benefits. The benefits might include discounts on goods the employer sells, extended break times, leniency if the worker is occasionally late, and so on.

The effect of the minimum wage hike might well be to change the $16 per hour compensation package into $15 in wages and $1 worth of benefits. Minimum wage proponents would count this as a victory – the worker kept his or her job and now has higher wages. But in fact, standard economic theory would tell us that the worker is now worse off.

If the previous employment contract was $14 in wages and $2 in benefits, it was probably because the worker found this preferable to $15 in wages and $1 in benefits. Both packages cost the employer the same, so the employer would offer whichever the worker preferred, since keeping workers happy is good for business in the long run. So the minimum wage, by forcing the worker to instead take $15 in wages and $1 in benefits, makes the worker worse off.

Meanwhile, other employment regulations, such as strengthening “labour protections” for gig workers – or indeed any workers – are in economic principle similar to a minimum wage law, except they instead legislate minimum benefits. These regulations would, like a minimum wage law, put some workers out of jobs while making many others worse off even if they keep their jobs.

The bottom line is that the government cannot help workers by limiting their options. Unfortunately, the Liberals propose to do just that by expanding employment regulations.

Matthew Lau is a fellow at the MEI. The views reflected in this op-ed are his own.