By: Jeff Pollock
January 22
, 2018

Ontario’s minimum wage jumped by 21% on January 1 to $14.00 per hour. It will increase to $15.00 next year, and then adjust by the rate of inflation thereafter. While polls indicate that 60% of Ontarians support the decision, we’re hearing more and more from clients and industry contacts about the hidden cost to this decision.

The foreseeable future may offer higher prices and fewer jobs.

Many businesses – particularly those with thin margins – have raised prices in response to their cost curve shifting upwards. Of course, this assumes that their customers will accept the price increase to begin with as some products are more elastic than others. For example, the demand for gasoline doesn’t alter much as its price at the pump changes, but with the assortment of branded food items at the grocery store, a shopper can simply switch to an alternative if their preferred item becomes too expensive.

Fewer jobs is an additional consequence to consider. According to the Bank of Canada, there will be 60,000 fewer jobs created in Canada by 2019 as a result of the minimum wage hikes. To put that into perspective, Canada added just over 422,000 jobs in 2017 (394,000 full-time and 28,000 part-time). Part of this will be due to businesses hiring fewer employees (particularly young people) or possibly laying off existing staff, not to mention the heightened urgency to now automate operations even sooner for better efficiency. One cannot help but notice the self-checkout cash registers spurring up in more and more retail locations nowadays.

Don’t forget that there are additional costs when hiring a new employee. Vacations, sick days, paid breaks, overhead required to seat a body, and health benefits all add to the expense of hiring a human over a computer.

The argument in favour of this policy decision has been that the 8% of all employees who earn a minimum wage will reinvest their additional income in the economy by spending more, and consequently offset these higher costs faced by businesses. Maybe, but the Bank of Canada believes that an uptick in inflation will lead to slightly higher rates, and serve to contract any consumption gains.

Our Investment Committee is taking into consideration the compensation paid to its employees by companies were own for clients, and we constantly ask ourselves whether the business has the ability to pass on higher prices to its customers. The stock price of companies that command pricing power have historically offered strong returns to its investors, and we continue to look for investment ideas that accompany this very attribute.

 

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