As of January 2018, Ontario’s minimum wage increases from $11.60 to $14 per hour, and in January 2019, the rate increases to $15 per hour. Politicians, economists, small business owners, and analysts are all speculating on how the increase in minimum wage is going to affect small businesses in particular.
Identifying Businesses Most Likely to Be Affected
Only some small businesses are likely to be affected by a shift in the minimum wage, and it largely depends on the industry. Only a few industries such as restaurants, retail, and hospitality tend to pay their workers minimum wage. Businesses in many other industries such as manufacturing, health care, marketing, tech, and countless others already offer their workers more than minimum wage to be competitive.
Reevaluating Job Value
That said, even small businesses that don’t pay workers minimum wage are likely to be indirectly affected by the shift. Employers decide how much to pay their workers based on skill and the work done, but they also select rates that are likely to help them retain their employees. Generally, jobs tend to pay more if they involve more training and staffing costs. In these situations, businesses need to focus on retention so they don’t lose too much money in recruiting, staffing, and training costs.
To ensure they don’t lose employees to other opportunities, small businesses may have to increase their wages. For instance, if a small business offers $15 as a wage, that may be competitive in 2017 when Ontario’s minimum wage is less than $12, but in 2019 when minimum wage is $15, that rate is no longer competitive so the business has to adjust and reevaluate how it assesses job value. Otherwise, as indicated above, it may face excess training and hiring costs.
Changing Business Practices
To afford the increases to minimum wage, many small businesses have to adjust their business models. Some businesses simply need to reduce their profit targets and take their extra payroll costs from their profits. Businesses that already operate on tight profit margins need to find money in other places.
In particular, businesses may increase sales targets or raise prices. John Schmitt from the Centre for Economic and Policy Research in Washington, D.C. created a comprehensive report based on multiple studies on the effect of minimum wage increases, and he reported that the most popular ways businesses have dealt with increases in minimum wage are by boosting productivity and reducing turnover.
Helmi Ansari, Chief Executive Officer of a small business with locations in Guelph and Cambridge, explains why workers may be more productive in the face of wage increases. When talking about why he pays his employees a living wage, this entrepreneur says that if his workers don’t make enough money to survive, they end up spending their days “thinking about how they’re going to pay the bills and put food on the table.” By alleviating those stresses with higher wages, Ansari’s businesses enjoy more productive workers. That may become the case for small businesses across the province.
In some cases, small businesses may deal with the shift by eliminating employees. According to Ontario’s Financial Accountability Office, the province may lose 50,000 jobs due to the change. A report from TD Bank puts that number at 90,000.
Until all the changes take effect, no one can conclusively determine how the increases may affect small businesses. Studies on minimum wage increases have inconclusive results on how these increases affect the economy in general or small businesses in particular. The effects largely depend on the percentage of the increase and the strength of the economy at the time.