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The Rules Of Economics Aren't Based On Reality

Human interaction is complex and includes intangible elements such as morality, honour and benevolence.

01/18/2018 11:43 EST | Updated 01/18/2018 11:51 EST

On January 8, Ontario Minister of Labour Charles Sousa was taking questions from the press at Queens park around the new Ontario Minimum wage, which has risen to $14 an hour.

Throughout the interview, Sousa mentioned, at least twice, the curious case of the market acting counter-intuitively in response to the increase. He made this reference in response to the two kinds of stories that are being highlighted in the media.

The first, of large organizations and franchises punishing employees for the raise by either reducing their hours, paid breaks or other benefits. The second, of smaller shops continuing their tradition of paying staff above the minimum wage.

But is this really a counter-intuitive reaction of the market to the wage increase? Or is it the assumptions of the market that is, from the get-go, mistaken?

Toronto Star via Getty Images
Protesters hold signs outside a Tim Horton's location in Toronto.

The rules of economics are notoriously based on the single assumption that we, as human beings, operate on the rule of maximization. That is, we look for opportunities to maximize benefits for ourselves.

Of course, this is a grossly false assumption. Human interaction is complex and includes intangible elements such as morality, honour, benevolence etc. It's the complexity of these social relations that economic models can never account for, and it is these complexities that result in smaller firms paying their staff more than the required minimum wage.

Social relations in larger organizations, however, are much more distant and therefore follow closer to the economic models. This lack of personal social relations is clearly reflected in the statistics. A study by 15 and Fairness, the main lobbying group behind the minimum wage increase and labour law overhauls, revealed that larger firms in Ontario are five times more likely to be the ones paying minimum wage, and that in 2013 nearly 50 per cent of those earning minimum wage worked in organizations with more than 500 employees.

The other side

This doesn't mean that the case of small businesses that will be negatively impacted by the minimum wage increase in non-existent. The same report claims that 25 per cent of those earning minimum wage work in "very small" organizations with under 20 employees.

But to properly assess the impact on these organizations, one needs to consider other benefits granted to small businesses. If these benefits do not offset the increase in minimum wage enough then more should be done, and perhaps the Liberal government should introduce new measures alongside the list of overhauled benefits they have introduced as this year's provincial elections approach.

Minimum wage increases have always been, and will always be, a point of contention among economists

On the other hand, and as those who support the free market like to remind us, one can always argue that participation in the economy is completely voluntary. And if smaller businesses have not been acting competitively enough, then they just need to deal with the circumstances of their past decisions.

This might be a ruthless assessment, but it is the same rule that governs individual employment. Why is it then that increased competition is frowned upon when applied to small businesses?

The political

Minimum wage increases have always been, and will always be, a point of contention among economists, and there are studies out there that can prove both sides of the argument.

But it's important to remember that the conversation around it is heavily skewed. Media outlets were quick to jump on, and willingly misinterpret, the Bank of Canada's report on job creation for the year ahead. Media outlets were quick to tie the report, which took an overview of the entire Canadian economy, to the rise in minimum wage in Ontario, a gross misrepresentation. Yet, this is nothing new. The neatness of economic models that usually relay information around two isolated variables (which is, again, not how the world works) allows the information to easily be manipulated to present whatever image one would like.

Economic models will always fall short of intuiting what societies do, and more importantly, what societies need.

Case in point would be the Liberal government's celebration of the lowest unemployment rate in 40 years. Yet this unemployment rate has been decreased through the overreliance on contract and part-time work. A recent report from Statistics Canada remarkably shows that only half of all Canadian workers between the ages of 25 and 54 worked full-time, full-year jobs in 2015.

This statistic though is not counter-intuitive. Businesses, where they can, will continue to cut their costs. It would be interesting to see which employers are responsible for this increased rate of dependence on "casual" labour and if this trend follows that of the minimum wage.

The rise in such casual jobs makes the case for legal overhaul even stronger, as pointed out by last year's teachers strike in Ontario.

Intuiting society

Economic models will always fall short of intuiting what societies do, and more importantly, what societies need. Thirty per cent of Ontario's workers were making under $15 an hour, and will benefit from this increase, which will not only improve their quality of life but provide greater disposable income to be pumped back into the economy. Even if that money wasn't pumped back into the economy, don't we all deserve work that allows us to get by?

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The debate on minimum wage, however, highlights a much deeper conflict than what the result of such actions may be. It highlights a debate on whether our policy should be dictated by our social relations or by the rules of the market. It's a debate that, at its core, pits society against business.

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