Effects of increase in minimum wage on the economy and businesses

The Ontario government has recently announced that it will be raising the minimum wage once again, this time to $16.55 an hour on October 1, 2023.  As the province and country continue to combat inflation and the high cost of living that comes with it, this increase will mean that close to 1 million workers making the minimum wage working a 40 hour work week will see a pay increase of about $2,200 a year.  This increase will also make Ontario’s minimum wage the highest of all the provinces in Canada.  With that said, there are still advocates who have voiced that it is still not enough and the minimum wages should be at least $20.  The reasoning behind this is the cost of living with the average living wage in Ontario being $19 and over $23 in the GTA.


Now on the surface, raising minimum wages does seem to solve many problems and help bring a lot of help to low income families who need help the most in our economy.  However, nothing is ever just that simple and there are always many sides to any given topic.  Below, let’s explore key factors and the effects that minimum wages has on business and the economy as a whole:


Increased labour participation

With an increase in minimum pay, there is clear motivation and incentive for individuals to go out and find a job, or for those who are already working to increase the hours they may be working.


Increased job stability

When workers feel more appreciated, sense of self-worth, and increased satisfactory in the workplace as a result of a wage increase, this usually results their job stability.  When workers are able to afford basic living essentials and do not have to worry about having to choose between paying rent and bills or putting food on the table, they’re not as inclined to have to constantly find a new position that pays more.


Reduced wage inequalities

With an increase in minimum wages, the wage inequality will continue to decrease amongst women, minority groups, as well as the youth and older worker groups.  This is because this type of wage increase does not discriminate and is given to all who are making the minimum wage.


Businesses will inevitably have to also adjust the wages of other positions as well.  If only the minimum wage jobs are increased, but other positions remain the same, many more people who were making slightly higher than the minimum wage may forfeit the slightly higher paying positions in pursuit of lower stress, responsibility and workload positions that are typically found with minimum wages positions.  This will lead a lost of talent in certain industries and businesses causing a negative effect on the economy.


Stimulated economy

With more money at their disposal and all basic living expenses covered, individuals are capable and likely to spend more.  In theory, this gives a boost to our economy and allows businesses to generate more revenue, leading to more job openings with better offerings which in turn will encourage a higher labour participation rate.


Increased and transferred costs

So far, it appears that an increase in minimum wage brings lots of benefits to the economy and a catalyst to growth, but nothing is without costs.  In this case, the burden of this cost is given entirely to employers and businesses to fuel the growth that comes with it.  And before businesses can even see any of the benefits (if they ever see it) that in theory comes with a stimulated economy, they must endure the added costs that come immediately.  For the smaller businesses who have been operating under razor thin margins, this may be especially difficult.


To comply with such mandatory increases in wages, some businesses may have to evaluate headcount and find ways to stay lean and become more efficient.  What used to be a job for 5 people, may need to be done by 3 or fewer.  The other option is to increase prices of products / services offered and transferring the costs to consumer, thus starting / repeating the vicious cycle of increases.


Shift in labour

In the past, it was argued that unemployment would increase due to increases in the minimum wage because businesses reducing staff is the easiest way to manage operating expenses.  However, labour market studies have shown that is not the case, and there have been increases in recent years even as minimum wages has continued to increase.  Now this is a result of many factors and one to point out is a shift in labour.


As discussed in previous points, if businesses don’t adjust wages for all positions across the board, it raises the risk of a lost of talent due workers leaving their jobs that pay marginally higher than minimum wage positions for lower stress, responsibilities, and workload.  Not every business can afford to make those types of increases and some business may even need to decrease their headcount leading to more job losses in some sectors than others.  Together, this forces workers to gravitate towards new career paths and industries that offer these minimum paying positions.


The topic of minimum wages will always have opposing views as workers continue to struggle to make ends meet and businesses have to find ways to fund the added cost of operation.  From the government’s perspective, they are giving plenty of time for businesses to plan for the upcoming increase in minimum wages, but businesses are saying they too need more support as well to break this vicious cycle of increasing wages leading to increasing in costs and prices.  There has to be a better way to bring wage equality in the economy.


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