Minimum wage hike. YAY or NAY? A Canadian bookkeepers’ perspective.
This blog may be in direct response to the new proposed 32% Ontario Minimum wage hike, however the reasoning is economics 101 and has a global interpretation. The new proposed minimum wage has an array of mixed emotions. On one hand why wouldn't anyone want that large of a pay increase? I mean they could afford more, raise their financial situation, or maybe start that savings account they have been trying to do. This sounds great to anyone doesn't it? Sure, if you insist on keeping your rose coloured glasses on. Now, let’s take those glasses off and have a good hard look at the true impact of a 32% wage hike.
Let’s look at the business side of things. According to Statistics Canada, as of December 2015, there were 1.17 million businesses in Canada. Of these, 1.14 million (97.9 percent) business were small businesses, 21415 (1.8 percent) were medium-sized businesses and 2933 (0.3 percent) were large enterprises. The small businesses in Canada employ a total of 5,137,147 people. That is 48.3 percent of Canada's total workforce. It seems pretty clear that the small business has quite the impact on Canada's economics. Now, it's true, most small businesses just can't afford to pay the same wages as the large business. But the small business environment is much different. Take mine for example. I give my employees (even though I only have 2), the flexibility with their hours so that they can drop their children off at school or pick them up after school. If they want extra days off because their children are sick, or for additional family time, it is without pay, but they can have it. I foster a happy and flexible work environment. That is because those are the main reasons I went into business for myself in the first place. If these 2 employees could not have such flexibility, their lives would be very different. They may not be able to work or must give on the other side and reduce the quality of their family life. I also give them bonuses when I can during successful times because I want to recognize that they helped contribute to the success and to show that I do appreciate all that they do even though they could make more working at a larger firm. Most small business owners make much less than they would if they were employees for a large corporation, but the small business is still quite important to our economy. As mentioned above, they create a lot of jobs, they foster better work / family life balance which in turn creates happier and more satisfied employees, as well as they keep the big box stores from over running the markets and setting the standards.
Now, let’s crunch some numbers and see how this increase will really impact the economy. The small business will need to raise their prices in order to keep the same profit margins, which for most small businesses, is not much. Now, I know that some small businesses will only raise their prices to stay at the same profit level, but there are others who will raise their prices higher and still blame the government, because, no one will challenge them further even though it does not seem right. But guess what, this also means that the large companies have to either increase their rates or reduce the packaging sizes to include less volume for the same prices. In similar instances, companies have responded by reducing the full time positions and having more part time positions. By doing this the company can save on benefits and part time workers are paid lower rates than full time workers. Even though they may have higher profit margins, they still have a board of directors to report to that still want the same or better profit margins. This will impact everything from groceries, to services, the cost of purchasing houses and yes, even the interest rates at the bank. Remember, not only do those at minimum wage need an increase, but those employees that were making $3.00 per hour more, need to be increased as well. That is a lot of money for these businesses to make up for, whereas smaller increases in minimum wage are more often absorbed without such pricing increases.
Now, let's look at things form the employee side, these people now making 32% more are making too much for some of the government benefits. They will qualify for a lower amount of the GST/HST credit, Ontario Trillium Benefit, Working Income Tax Benefit and yes, the Canada Child Benefit. But remember, their pay and benefits will balance out in the end, yet they are paying more for products and services. Now, add in that this may be enough to push the employees also into a higher tax bracket. Doesn't look so good now does it?
So if not the businesses or the employees, who benefits? Wait, the government gets to pay out less in the credits and benefits as well as the increase in taxes from the employees. Now, what some of you may not be aware is the other side of the cost of the business to have employees. The employer needs to pay into CPP dollar for dollar that they deduct from their employees. The cost to pay into EI, is higher, the employer needs to pay $1.40 directly towards EI for every dollar of EI that is deducted from their employees. Let's not forget WSIB (or each provinces equivalent as I am in Ontario) and depending on the gross payroll, they employer may have to contribute to the EHT (Employer Health Tax). Think that's all? Think again, even though the profits might be the same for the businesses at year end taxes, more HST is paid by the consumer for the increase in prices for products and services.
The domino effect that such a large increase in minimum wage will have is something that most people are not realizing. Small increases in minimum wage are often just absorbed by the companies and not met with such reactions, but there is no way that any business can or in the case of those that could, will absorb and ignore. So I ask again, who actually wins by such a high increase?
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Tanya is an advanced certified QuickBooks Online ProAdvisor, with over 20 years bookkeeping and income tax experience. She is also the founder of Cloud Bookkeeping Services, and the newly launched Bookkeepers Bootcamp. Tanya is proud to be a 2016 Intuit sponsored Black Swan, mentoring under Ron Baker or the VeraSage Institute who is the Grandfather of Value Pricing. Tanya also contributes her time as a volunteer mentor for Futurepreneur Canada.