Sept. 13, 2011

Minimum Wages, Immigration and Social Order

An unsung aspect of normal economic growth is it moves the population up to better jobs, specifically from the bottom of the heap. However, this is not happening in the West and here I discuss why and propose a technical fix involving immigration. The bottom is in bad shape in most Western countries and improving it would be socially popular.

When Japan developed in the 1950s and 1960s it moved from low tech to high tech, improving wages and living standards. The worst of the low tech businesses were gotten rid off, moved off shore. The pattern was then repeated with the four Asian Tigers in the 1960’s and 1970’s. Hong Kong, Singapore, Korea and Taiwan all moved to Western levels of income. In fact this is the plan for all the emerging economies, to move up to higher technology. It does apply to the West as well, specifically to the cities that have robust growth but a large McLabour component. However, this upward movement isn’t happening in Western cities – which is the actual part of the idea that is unsung.

In an economy with growth people will move up as better jobs become available. When someone gets a better job he or she is replaced in turn, typically from below, a pattern which is then repeated to become a domino effect. The domino effects in the labour markets reach all the way down to the worst companies, the worst jobs. Then what happens with growth is at the very bottom as workers move down the street to better jobs the worst employers will run out of bodies, wages will inflate, and they won’t be able to keep up. They will contract, go out of business or move. This is how society moves up better jobs and atrophies the worst industries. Technically this is the Knowledge Economy. That’s exactly what it is. The moving people up to better businesses is the alternative explanation to immigration than the idea that immigrants will take the jobs the born here don’t want to do.

In general in a growth economy as good jobs are being created labour people move to the better industries and as spot shortages develop there’s wage inflation. The stronger businesses react by offering better wages, recruiting from below and/or doing on the job training. Businesses across-the-board that can’t keep up like this go under. However, the domino effect in the labour market assures that growth squeezes the bottom in particular. Also the high level of formal education in our society these days should cool the wage inflation in the higher value added businesses and tend to keep these firms and the economy steady or growing.

Many Western cities have good growth and the labor shortages are met with immigration. All immigration programs are bureaucratic and cause some unemployment, which economists explain away as “a short term cost to long term growth”. However, the unemployment suppresses the wage inflation at the bottom and eventually short circuits the upward movement to better jobs. In fact the persistent unemployment from bureaucratic immigration movements is an enabler of the further growth of the low wage sector.

The Greater Toronto Area, now population 5.6 million, is the center of the Canadian economy, one of the worlds leading immigration cities and has always had good growth. However its low wage sector is now large and troubling, some 16% of the jobs for adults pay $12 an hour or less. Toronto is an example of a good growth city with strong immigration leaving the bottom in bad shape. The low wages are unpopular and a social problem.

If you have immigration, you should legislate a high minimum wage, possibly just for a city region, to correct for the suppression of the “Upward Growth” at the bottom. That’s the technical idea being promoted here: to legislate an aggressive minimum wage for a growth city area to compensate for immigration suppressing upward growth.

The low wage economy is pretty dysfunctional. It causes poverty, affects most families over time, and is highly subsidized as low wage workers don’t pay their fair share of taxes. The low wage economy is characterized by too many small businesses that are not busy, productive, or profitable. They are economically dysfunctional as well as socially dysfunctional. You can see this with your eyes in any city in Canada where the main roads are lined with strip-malls, fast food and restaurants and marginal small businesses with minimal customer traffic.

A high legislated minimum wage would inflate, cost jobs and slow growth. However in the Western growth cities this mainly means you trim immigration accordingly.

Cities like Calgary or Edmonton in the Canadian oil patch pre-recession which had good economies but also robust immigration posted some better numbers. There adult workers earning less than $12 went down to 7% of the jobs. The de facto minimum wage was reported as a range of $10 to $12 an hour. (The de facto minimum wage is the wage required to get a reasonable work to stay for a year and is $8 to $10 in most of Canada.) A legislated high minimum wage there could be $12.50 or so – an increase of $1.50 an hour for the worst off on average. The inflation from that would only be ¼ of 1% in the area. Calgary and Edmonton had good economies but the immigration still shaped their growth, including at the bottom. Calgary and Edmonton, the Canadian oil patch, would be the locals to experiment like this – to see how far contouring of the economy from the bottom can go.

At this time Canada and the USA have the same nominal average wage so the $12.50 figure would apply to America as well.

A family with two people working at a $12.50 minimum wage would earn $50,000 a year. This is $7,000 above the Low Income Cut Off (LICO) for a family of four. That’s just at minimum wage. In addition they would effectively be subsidized by the nanny state as they don’t pay much tax. It’s not much, but it is an improvement over the quite mean situation currently. It takes the pressure of the worst off, improves a number of social and economic problems.

The worst off workers would be protected by a high legislated minimum wage. In fact it protects them from the side effects of immigration, which is keeping unemployment persistent, the de facto minimum wage down and preventing upward growth. Immigration suppresses wage inflation and particularly at the bottom where the inflation is useful in weeding out worst businesses. The suppression of wages at the bottom is also a tax on the worst off worker, making such people very highly taxed in effect. A $12.50 legislated minimum wage in an immigration city is less of nanny state subsidy and more of a technical correction of these two problems with the strategy to maximize economic growth with immigration. It’s of note that immigration is central planning of the economy by the government so a high minimum wage protects the worst off from the government.

Also be reminded that much of the labour force is protected, protected from the free market. Unions, big corporations and governments shelter their employees from labour market vagaries. Skilled and professional workers with some economic power are also protected by their employers as well. They are all treated like a long term investments and their wages do not bob up and down with the market, as do commodity prices as a contrast.

Some times people oppose raising minimum wage, saying that people can work their way out of worst jobs over time. However the idea sells because it particularly applies to women. Women are still largely involved with bring up the children. A women that stays at home or works part time until she is 45 and then returns to work, into a challenged labour force, is going to have a tough time. This is especially as she will still be busy with the duties at home and will have limited time available. This is a concern because it can apply to Grandmom, Mom, the wife, the daughters and to close female relatives such as on the in-law side. Male workers are generally freer to work towards a better paying job. So the idea has popular appeal, more than additional government spending on nanny programs.

The main immigration cities of Canada; Montreal, Toronto and Vancouver have been swamped with immigrants and despite good job growth are well behind Calgary and Edmonton. They have actually had more job growth than the oil patch cities, in absolute numbers. These three central cities are now characterized by people having dropped out of the labour force because of the difficulty to find suitable employment. Raising minimum wage there might be delayed until their economies improved.

A major aspect of the Canadian labour market is it has not been producing good jobs. The jobs being produced are contract positions, in boom and bust industries and typically without a pension plan. On average the jobs been created are below average. Boosting the minimum wage to $12.50 would cut the bottom and skew the arithmetic average of the jobs being created back up.

Canada has always been about good jobs, it’s our philosophy. However, it has been backsliding in this regard for three decades or so.  It has affected social order, more and more people are insecure. Everyone, every politician, is concerned about good job creation but good job creation is elusive. An alternative is to simply cut the bottom with a high minimum wage as growth produces replacement jobs. You can pay now with a little inflation or pay latter with an even worse jobs market and the social and economic costs of that. Even if a city does have its share of good job growth if doesn’t connect with the bottom you are left with a dysfunctional society. The idea is fair, optimal and entirely strategic. It’s a national industrial strategy for a nation.