The Conservative Case for a Living Wage - A Hundred Years of History
In the late 19th century, New Zealand became the first country in the world to have a minimum wage. During and after the Great War, Canadian Provinces followed the example. Ever since then, there has been heated debate - not so much on whether or not we should have a minimum wage, but at what level that wage should be set.
For a bit of historical context, there's a wonderful article available on JSTOR from the 1922 Journal of Political Economy, "The Minimum Wage in Canada", contrasting the Canadian adoption of the minimum wage to American reluctance. The reasons for the implementation of the minimum wage in Canada ranged from recognition of successful implementation in other jurisdictions, to support within the labour movement (by contrast, apparently, to disdain within the US labor movement), and even support within our industrial sector "because it served to protect them against the competitive undercutting of wages."
With additional women doing industrial work over the course of the war and afterward, one of the drivers toward minimum wage was pay equity. (Whether this was motivated by a progressive sense of equality, or out of an anti-competitive concern by men that low-paid women were going to steal their jobs...well, think what you will. However, the historical evidence suggests that early minimum wages were designed to bring lower-than-average pay for certain groups into line with industrial norms of the day.)
Alberta's original minimum wage in 1917 was one of the only ones in those early days to apply to men at all, setting a minimum for nearly everyone of $1.50 per shift, which was nonetheless lower than what most men were being paid at the time. (Maximum shifts were 10 hours, and in today's dollars that would be about $27 per shift.)
In British Columbia, studies in the early 1920s showed that 40 percent of women in the mercantile industry earned less than $11 per week (or about $138 today); the average overall hourly wage in the industry was in the ballpark of $3.30 in today's dollars.
In Ontario, early minimum wages, depending on industry, were in the ballpark of $10 to $12.50 per week.
Since these early minimum wages were set, the minimum tended to move up and pause at irregular intervals, depending on the Provincial governments in power. With every incremental upward movement, industrial protests predicted mass job losses, unfettered price inflation, and other economic apocalypses.
With minimum wages that are, after adjustment for inflation, more than four times the 'original' minimum wages a century ago - which reflected actual industrial wages at the time - we are at a moment in history where we can look back and ask what the real impact of the minimum wage has been.
It may seem counter-intuitive, but we don't actually want zero unemployment. If unemployment rates fall too low, this is expected to drive inflation and economic stagnation. We need a reserve pool of labour to support economic growth and to keep wages from skyrocketing. The 'ideal' unemployment rate is arguably in the 4-5% range.
Since the implementation of minimum wages, the unemployment rate has fluctuated dramatically, from approaching zero in the roaring 20s, to nearly 20% in the Great Depression. In the post-WW2 years, it dropped again dramatically, and worked its way up gradually, peaking during recessions in the 80s and 90s, and since then has moved back down to approximately 6.3% across Canada.
One of the important takeaways here is this: These movements do not materially correlate to changes to the minimum wage. Some of the lowest unemployment rates we've ever had followed the original implementation of minimum wages. Our recent 4-decade unemployment lows are in the immediate wake of Ontario and others dramatically increasing minimum wage.
In the last year or so, there has been a great deal of discussion of Ontario's job markets, and how the forecasts (such as 90,000 jobs to be killed by minimum wage) turned out to be wrong...
...yet it's never that simple. There are several inputs into job growth and losses. Minimum wage is, without a doubt, a factor which contributes to that. Indeed, it is almost paradigmatically true that minimum wage hikes will cause some job losses...but, as will be explained below, that's not actually a bad thing. Moreover, the evidence suggests that job gains and losses are much more strongly influenced by larger economic trends than by minimum wage. (Imagine throwing a pebble into a pond during a windstorm. Does the pebble cause ripples? Sure. The physics of displacement are well-established. But you'll never really notice the impact in light of the other greater forces acting upon the surface of the water.) And the higher minimum wage can move the needle in other ways, increasing economic consumption by low-income individuals.
If you read past the headlines on forecasts of job losses, you see, for example, that the Bank of Canada projected an aggregate increase in overall wages from the minimum wage increase, even after accounting for the projected job losses.
The other takeaway is that there have been times - and we're in one of them right now - where even a market without any minimum wage at all would not sustainably support unemployment numbers much lower than what we have anyways.
In practice, here's what that means: Despite the minimum wage laws being what they are, our unemployment rate is within a couple percent of 'full' employment. And because the minimum wage laws exist, overall wages are almost certainly higher than they would otherwise be - meaning that there is more money in the hands of low-income Canadians, to be spent on consumer goods and services. The scale of this difference, however, is impossible to assess. Would wages still be down under $4 per hour? $8?
I recall a scenario from high school in Ontario, more than a few years ago, when a friend of mine described his request for a raise. He had worked for a fast food franchise for years, and was the de facto manager on evenings and weekends. The owner valued his contributions, and was willing to pay him $8 per hour - more than $1 over the minimum wage at the time - but absolutely could not go higher. My friend was left with the impression that going any higher than $8 would force the restaurant out of business, as the margins were just that small. (While there was certainly some hyperbole there, the reluctance to pay a valued employee any more was quite real.)
Today, that $8 would be worth $11 - less than 80% of Ontario's current minimum wage. The restaurant is still there, still maintaining similar staffing levels to what existed before. The price of a burger has increased, but people are still buying it - especially people making that $14/hour minimum wage.
This anecdote demonstrates a few larger points. The first, and most important, is that the minimum wage laws today do the same thing they did in 1918: Allow businesses to pay competitive wages without worrying about being undercut by competition who pay their employees less. If the labour cost increases on an industry-wide basis, this creates an across-the-board upward price pressure. I may want to pay my staff more, and pass along the additional cost to my customers, but I can't afford to do that unless my competition does the same.
Especially given the amount of resistance the private sector puts up to every incremental increase in wages, one can safely suppose that the minimum wage is substantially higher than what actual wages would be, in affected industries, otherwise. Therefore, we can safely say that the existence of our minimum wage framework increases the amount of money available for people to spend, without materially inflating unemployment rates.
One of the arguments frequently made by opponents of the minimum wage is that it will drive price inflation to the point that it will actually hurt the people who receive the wage raise. There are two theoretical mechanisms for such inflation, but the most obvious and most complained-about is that it increases the cost of production. It's common to hear employers claiming "If my labour cost increases by 15%, that means that I have to increase my prices by 15%!"
It will likely drive price inflation, yes - but on a much smaller scale.
Labour cost is just one part of the cost of doing business. And minimum wage (or near-minimum wage) labour cost is an even smaller subcategory of that cost.
In Ontario, approximately 60% of minimum wage workers work within the retail or food services industries. Within retail, that's about a quarter of their workforce. In the accommodation/food services industries, about 39% of workers earn minimum wage.
Labour-intensive businesses like food services, at the high end, might reasonably be expected to see labour make up a total of up to 40% of their overall costs. Let's be generous, and say that for some of these businesses, a third of their overall operating costs relate to minimum wage labour.
What that means is that an increase in the minimum wage of 15% (which, let's face it, is quite a large increase) can be expected to drive up the overall costs of a fast food restaurant by approximately 5%.
But wait - what about supply chain costs? Costs of inventory? Shipping? Well, one of the things that really simplifies this analysis is that industries further up the supply chain have dramatically smaller portions of their operating costs dictated by minimum wage labour. So while the transport industry is extremely labour-intensive in terms of cost allocation, almost none of that cost goes to minimum wage labourers. As a rough figure, we're fairly safe operating on the basis of a maximum operating cost increase of 5% for fast food, flowing from a 15% increase in the minimum wage.
If businesses want to make up for that increase in operating costs, and maintain the same margin, you might see a 5% increase in the cost of fast food. (In fact, the increase we have actually seen is much lower: In January 2018, Ontario restaurant prices were 3.7% higher than in January 2017 - which is only 0.8% higher than the year-over-year differential of the previous month. This suggests that part of the minimum wage increase is being reflected in higher prices...but not nearly all of it. That being said, for the sake of argument, let's suppose that the entire 5% gets passed along to to the consumer.)
I might argue that a 5% increase in the cost of fast food is trivial: My $2 coffee will cost $2.10. Not going to break the bank. But it's more complicated than that. In general, a 5% increase would be quite substantial, raising questions about maintaining marketshare, and about whether or not your customers can still afford your product, etc.
In this particular context, however, those concerns dissolve: The 'marketshare' issue evaporates in light of the industry-wide pressure; the consumer pool for low-cost convenience goods is unlikely to shrink significantly on the basis of such a change; and, most importantly, every minimum wage worker in the community - a demographic which is proportionally more likely to buy my product - now has 15% more income.
So suppose my restaurant makes $500,000 per year in revenues, and incurs $300,000 per year in operating costs. The minimum wage increase moves my costs to $315,000. I move my prices up by 5%, which, if demand stays the same, will yield $525,000 per year, generating a 5% increase to my net profits. Furthermore, demand is more likely to increase than decrease or stay the same, because of the increased income of my target customer base.
This brings us to the second theoretical inflationary pressure from an increased minimum wage: If the increased buying power of my customers increases demand more than the increased price decreases it, then, by virtue of the laws of supply and demand, the price will rise more to balance out that differential. However, while this will effectively reduce the buying power of higher-paid workers, this price inflation will necessarily be less (and probably significantly less) than the increase to the income of minimum wage workers.
Moreover, demand-driven price inflation will typically cause businesses to seek to increase their production capacity, putting a larger supply on the market, gradually bringing the price back down.
Libertarians generally dislike minimum wages altogether. They believe that such government intervention creates a distortion in the free market. Left to its own devices, the free market would grow more effectively and provide greater numbers of higher paying jobs.
The problem is that the minimum wage itself is not the only 'distortion' you need to watch in this context.
Creating a reasonable valuation for labour is difficult. In general, the definition of "fair market value" is defined by what vendors and consumers will agree upon. However, there are certain relatively immutable principles in valuation, including that a market cannot sustainably value a supply for less than the production cost of that supply. Pricing an item below cost is only a good practice in certain narrow circumstances, and with the sole exception of loss leaders, below-cost pricing schemes must always be temporary.
If I am producing a widget, and my production cost is $10 per unit, but nobody is willing to pay me more than $8 per unit...my business is not viable. One (or more) of three things will happen: I will have to find a way to reduce my production cost; my purchasers will have to increase what they are willing to pay; or my business will shut down. This is how the market works, and this is how it should be. The oversupply of widgets will correct itself by driving me (and/or people like me) out of business: Once the supply is reduced, the fair market value may increase to above the cost of production. (Or it may not: If a product is simply not valuable enough to the consumer to warrant its cost of production, it often should not be produced.)
Conceptually, it is difficult to regard the cost of production of full time labour as being anything less than 'the cost of that labourer feeding and housing himself and his dependents.' Anything less than that, and you're paying $8 for a widget that cost $10 to make.
In a truly free market, workers who are employed for less than a living wage...well, they wouldn't be so employed for long. If I'm not paying my employees enough for my employees to remain healthy, productive, and alive, then I'll lose those employees and have to hire new ones. Eventually, the oversupply of labour will theoretically correct itself in this manner.
There are three reasons the labour market doesn't actually work this way: The first is that labourers are created for non-economic, non-rational reasons. People don't generally procreate because it's profitable; they don't raise their kids because they expect a return on investment; they won't perfectly modify their behaviours based on rational considerations of the economic environment. The second is that labour supply is created and destroyed at a relatively slow rate compared to other more significant economic drivers. Even if I did consider not having kids because of the state of the job market, it would be unrealistic to think that I could assess the state of the job market twenty years in advance.
The third reason, and the most important for our purposes, is that we don't allow the market to freely correct the labour oversupply. We don't want below-cost pricing of labour to cause reductions in supply. There are obvious and compelling social and economic reasons for not doing so.
Instead, we have a variety of ways of helping the working poor: Subsidized housing; a large variety of tax credits; employment insurance and other income supports; private charities; food banks; etc.
There are relatively few people, even among libertarians, who will argue that food banks are a bad thing. But they are a market distortion. They subsidize the cost of production of labour. If I'm working full time, for less than a living wage, to try to support myself and my dependents, then the availability of food banks and other poverty crutches pick up the slack on the production cost of my labour - so my employer gets to continue to pay me less than what I need to live, and I continue to work for him anyways. In effect, we're missing any meaningful market-driven 'floor' on what wages an employer might provide to its workers.
All of these poverty amelioration programs have the impact of a thumb on the scale of labour valuation, preserving an oversupply, and encouraging the undervaluation of labour by employers. A mandatory minimum wage is a way of countering that thumb on the scale - of removing the subsidy, to a greater or lesser extent.
For the businesses that can pay their workers a living wage - their consumers are prepared to pay enough money for their products or services that they can operate profitably and their employees can reasonably subsist - there is no compelling public policy reason why our taxpayer- and philanthropy-funded programs should need to support those workers.
For the businesses that cannot pay their workers a living wage - if I pay my workers enough money for them to pay their own bills, I'll need to charge my customers amounts in excess of what they are willing to pay for my product - then, unless there is a compelling reason to directly and intentionally subsidize my business, my business probably should fail. Just like the one selling $10 widgets for $8.
Subsidies are not just expensive - such that we should not want our government writing blank cheques to subsidize businesses' undercompensation of labour - but they also create market distortions that ripple on a wider basis: When a subsidized product hits the market, it generates downward pressure on prices. Competitive products - created in a more efficient, cost-effective manner, pursuant to a business model that would be viable and sustainable in the absence of subsidies - have a hard time maintaining market share: You end up suppressing good, strong, desirable business models by artificially (and expensively) propping up weaker ones.
None of which is to say that there aren't businesses or industries that we might consider subsidizing. However, that is, and should be, a different debate: If the industry in which I operate simply can't sustain itself while paying my workers enough that they won't need public assistance, but there are compelling public policy reasons why society should want my industry to remain viable despite being uneconomical, then we might consider other direct or indirect industrial subsidies to offset the hardship of an elevated minimum wage.
In the final analysis, the core question of a living wage is this: When an individual is gainfully employed, engaged in remunerative labour that is profitable to his or her employer, do we believe that any shortfall in his reasonable ability to cover his own basic expenses should be the responsibility of the government? Or of the employer utilizing his labour?
The sensible conservative answer would seem to be the latter.
Conclusion
As we saw during the 20th century, a strong middle class drives a strong economy. Higher wages are better for society as a whole. Henry Ford understood this a hundred years ago: He dramatically increased the wages for his workers, on the premise that he wanted them to be able to afford the products they were making. He reduced their working hours, understanding that additional leisure time would improve business by increasing their consumption of goods. Ford grew one of the most successful businesses of the industrial era by pioneering some of the most progressive labour policies that we observe in contemporary industry.
A mandatory living wage, counteracting the downward pressure that existing subsidies put on market-driven wages, would be a good start.
For a bit of historical context, there's a wonderful article available on JSTOR from the 1922 Journal of Political Economy, "The Minimum Wage in Canada", contrasting the Canadian adoption of the minimum wage to American reluctance. The reasons for the implementation of the minimum wage in Canada ranged from recognition of successful implementation in other jurisdictions, to support within the labour movement (by contrast, apparently, to disdain within the US labor movement), and even support within our industrial sector "because it served to protect them against the competitive undercutting of wages."
With additional women doing industrial work over the course of the war and afterward, one of the drivers toward minimum wage was pay equity. (Whether this was motivated by a progressive sense of equality, or out of an anti-competitive concern by men that low-paid women were going to steal their jobs...well, think what you will. However, the historical evidence suggests that early minimum wages were designed to bring lower-than-average pay for certain groups into line with industrial norms of the day.)
Alberta's original minimum wage in 1917 was one of the only ones in those early days to apply to men at all, setting a minimum for nearly everyone of $1.50 per shift, which was nonetheless lower than what most men were being paid at the time. (Maximum shifts were 10 hours, and in today's dollars that would be about $27 per shift.)
In British Columbia, studies in the early 1920s showed that 40 percent of women in the mercantile industry earned less than $11 per week (or about $138 today); the average overall hourly wage in the industry was in the ballpark of $3.30 in today's dollars.
In Ontario, early minimum wages, depending on industry, were in the ballpark of $10 to $12.50 per week.
Since these early minimum wages were set, the minimum tended to move up and pause at irregular intervals, depending on the Provincial governments in power. With every incremental upward movement, industrial protests predicted mass job losses, unfettered price inflation, and other economic apocalypses.
With minimum wages that are, after adjustment for inflation, more than four times the 'original' minimum wages a century ago - which reflected actual industrial wages at the time - we are at a moment in history where we can look back and ask what the real impact of the minimum wage has been.
Wage and Unemployment Metrics: Why the Minimum Wage Bolsters the Economy
It may seem counter-intuitive, but we don't actually want zero unemployment. If unemployment rates fall too low, this is expected to drive inflation and economic stagnation. We need a reserve pool of labour to support economic growth and to keep wages from skyrocketing. The 'ideal' unemployment rate is arguably in the 4-5% range.
Since the implementation of minimum wages, the unemployment rate has fluctuated dramatically, from approaching zero in the roaring 20s, to nearly 20% in the Great Depression. In the post-WW2 years, it dropped again dramatically, and worked its way up gradually, peaking during recessions in the 80s and 90s, and since then has moved back down to approximately 6.3% across Canada.
One of the important takeaways here is this: These movements do not materially correlate to changes to the minimum wage. Some of the lowest unemployment rates we've ever had followed the original implementation of minimum wages. Our recent 4-decade unemployment lows are in the immediate wake of Ontario and others dramatically increasing minimum wage.
In the last year or so, there has been a great deal of discussion of Ontario's job markets, and how the forecasts (such as 90,000 jobs to be killed by minimum wage) turned out to be wrong...
...yet it's never that simple. There are several inputs into job growth and losses. Minimum wage is, without a doubt, a factor which contributes to that. Indeed, it is almost paradigmatically true that minimum wage hikes will cause some job losses...but, as will be explained below, that's not actually a bad thing. Moreover, the evidence suggests that job gains and losses are much more strongly influenced by larger economic trends than by minimum wage. (Imagine throwing a pebble into a pond during a windstorm. Does the pebble cause ripples? Sure. The physics of displacement are well-established. But you'll never really notice the impact in light of the other greater forces acting upon the surface of the water.) And the higher minimum wage can move the needle in other ways, increasing economic consumption by low-income individuals.
If you read past the headlines on forecasts of job losses, you see, for example, that the Bank of Canada projected an aggregate increase in overall wages from the minimum wage increase, even after accounting for the projected job losses.
The other takeaway is that there have been times - and we're in one of them right now - where even a market without any minimum wage at all would not sustainably support unemployment numbers much lower than what we have anyways.
In practice, here's what that means: Despite the minimum wage laws being what they are, our unemployment rate is within a couple percent of 'full' employment. And because the minimum wage laws exist, overall wages are almost certainly higher than they would otherwise be - meaning that there is more money in the hands of low-income Canadians, to be spent on consumer goods and services. The scale of this difference, however, is impossible to assess. Would wages still be down under $4 per hour? $8?
I recall a scenario from high school in Ontario, more than a few years ago, when a friend of mine described his request for a raise. He had worked for a fast food franchise for years, and was the de facto manager on evenings and weekends. The owner valued his contributions, and was willing to pay him $8 per hour - more than $1 over the minimum wage at the time - but absolutely could not go higher. My friend was left with the impression that going any higher than $8 would force the restaurant out of business, as the margins were just that small. (While there was certainly some hyperbole there, the reluctance to pay a valued employee any more was quite real.)
Today, that $8 would be worth $11 - less than 80% of Ontario's current minimum wage. The restaurant is still there, still maintaining similar staffing levels to what existed before. The price of a burger has increased, but people are still buying it - especially people making that $14/hour minimum wage.
This anecdote demonstrates a few larger points. The first, and most important, is that the minimum wage laws today do the same thing they did in 1918: Allow businesses to pay competitive wages without worrying about being undercut by competition who pay their employees less. If the labour cost increases on an industry-wide basis, this creates an across-the-board upward price pressure. I may want to pay my staff more, and pass along the additional cost to my customers, but I can't afford to do that unless my competition does the same.
Especially given the amount of resistance the private sector puts up to every incremental increase in wages, one can safely suppose that the minimum wage is substantially higher than what actual wages would be, in affected industries, otherwise. Therefore, we can safely say that the existence of our minimum wage framework increases the amount of money available for people to spend, without materially inflating unemployment rates.
The Business Case for a Higher Minimum Wage
One of the arguments frequently made by opponents of the minimum wage is that it will drive price inflation to the point that it will actually hurt the people who receive the wage raise. There are two theoretical mechanisms for such inflation, but the most obvious and most complained-about is that it increases the cost of production. It's common to hear employers claiming "If my labour cost increases by 15%, that means that I have to increase my prices by 15%!"
It will likely drive price inflation, yes - but on a much smaller scale.
Labour cost is just one part of the cost of doing business. And minimum wage (or near-minimum wage) labour cost is an even smaller subcategory of that cost.
In Ontario, approximately 60% of minimum wage workers work within the retail or food services industries. Within retail, that's about a quarter of their workforce. In the accommodation/food services industries, about 39% of workers earn minimum wage.
Labour-intensive businesses like food services, at the high end, might reasonably be expected to see labour make up a total of up to 40% of their overall costs. Let's be generous, and say that for some of these businesses, a third of their overall operating costs relate to minimum wage labour.
What that means is that an increase in the minimum wage of 15% (which, let's face it, is quite a large increase) can be expected to drive up the overall costs of a fast food restaurant by approximately 5%.
But wait - what about supply chain costs? Costs of inventory? Shipping? Well, one of the things that really simplifies this analysis is that industries further up the supply chain have dramatically smaller portions of their operating costs dictated by minimum wage labour. So while the transport industry is extremely labour-intensive in terms of cost allocation, almost none of that cost goes to minimum wage labourers. As a rough figure, we're fairly safe operating on the basis of a maximum operating cost increase of 5% for fast food, flowing from a 15% increase in the minimum wage.
If businesses want to make up for that increase in operating costs, and maintain the same margin, you might see a 5% increase in the cost of fast food. (In fact, the increase we have actually seen is much lower: In January 2018, Ontario restaurant prices were 3.7% higher than in January 2017 - which is only 0.8% higher than the year-over-year differential of the previous month. This suggests that part of the minimum wage increase is being reflected in higher prices...but not nearly all of it. That being said, for the sake of argument, let's suppose that the entire 5% gets passed along to to the consumer.)
I might argue that a 5% increase in the cost of fast food is trivial: My $2 coffee will cost $2.10. Not going to break the bank. But it's more complicated than that. In general, a 5% increase would be quite substantial, raising questions about maintaining marketshare, and about whether or not your customers can still afford your product, etc.
In this particular context, however, those concerns dissolve: The 'marketshare' issue evaporates in light of the industry-wide pressure; the consumer pool for low-cost convenience goods is unlikely to shrink significantly on the basis of such a change; and, most importantly, every minimum wage worker in the community - a demographic which is proportionally more likely to buy my product - now has 15% more income.
So suppose my restaurant makes $500,000 per year in revenues, and incurs $300,000 per year in operating costs. The minimum wage increase moves my costs to $315,000. I move my prices up by 5%, which, if demand stays the same, will yield $525,000 per year, generating a 5% increase to my net profits. Furthermore, demand is more likely to increase than decrease or stay the same, because of the increased income of my target customer base.
This brings us to the second theoretical inflationary pressure from an increased minimum wage: If the increased buying power of my customers increases demand more than the increased price decreases it, then, by virtue of the laws of supply and demand, the price will rise more to balance out that differential. However, while this will effectively reduce the buying power of higher-paid workers, this price inflation will necessarily be less (and probably significantly less) than the increase to the income of minimum wage workers.
Moreover, demand-driven price inflation will typically cause businesses to seek to increase their production capacity, putting a larger supply on the market, gradually bringing the price back down.
The Fiscal Case for a Living Wage
Libertarians generally dislike minimum wages altogether. They believe that such government intervention creates a distortion in the free market. Left to its own devices, the free market would grow more effectively and provide greater numbers of higher paying jobs.
The problem is that the minimum wage itself is not the only 'distortion' you need to watch in this context.
Creating a reasonable valuation for labour is difficult. In general, the definition of "fair market value" is defined by what vendors and consumers will agree upon. However, there are certain relatively immutable principles in valuation, including that a market cannot sustainably value a supply for less than the production cost of that supply. Pricing an item below cost is only a good practice in certain narrow circumstances, and with the sole exception of loss leaders, below-cost pricing schemes must always be temporary.
If I am producing a widget, and my production cost is $10 per unit, but nobody is willing to pay me more than $8 per unit...my business is not viable. One (or more) of three things will happen: I will have to find a way to reduce my production cost; my purchasers will have to increase what they are willing to pay; or my business will shut down. This is how the market works, and this is how it should be. The oversupply of widgets will correct itself by driving me (and/or people like me) out of business: Once the supply is reduced, the fair market value may increase to above the cost of production. (Or it may not: If a product is simply not valuable enough to the consumer to warrant its cost of production, it often should not be produced.)
Conceptually, it is difficult to regard the cost of production of full time labour as being anything less than 'the cost of that labourer feeding and housing himself and his dependents.' Anything less than that, and you're paying $8 for a widget that cost $10 to make.
In a truly free market, workers who are employed for less than a living wage...well, they wouldn't be so employed for long. If I'm not paying my employees enough for my employees to remain healthy, productive, and alive, then I'll lose those employees and have to hire new ones. Eventually, the oversupply of labour will theoretically correct itself in this manner.
There are three reasons the labour market doesn't actually work this way: The first is that labourers are created for non-economic, non-rational reasons. People don't generally procreate because it's profitable; they don't raise their kids because they expect a return on investment; they won't perfectly modify their behaviours based on rational considerations of the economic environment. The second is that labour supply is created and destroyed at a relatively slow rate compared to other more significant economic drivers. Even if I did consider not having kids because of the state of the job market, it would be unrealistic to think that I could assess the state of the job market twenty years in advance.
The third reason, and the most important for our purposes, is that we don't allow the market to freely correct the labour oversupply. We don't want below-cost pricing of labour to cause reductions in supply. There are obvious and compelling social and economic reasons for not doing so.
Instead, we have a variety of ways of helping the working poor: Subsidized housing; a large variety of tax credits; employment insurance and other income supports; private charities; food banks; etc.
There are relatively few people, even among libertarians, who will argue that food banks are a bad thing. But they are a market distortion. They subsidize the cost of production of labour. If I'm working full time, for less than a living wage, to try to support myself and my dependents, then the availability of food banks and other poverty crutches pick up the slack on the production cost of my labour - so my employer gets to continue to pay me less than what I need to live, and I continue to work for him anyways. In effect, we're missing any meaningful market-driven 'floor' on what wages an employer might provide to its workers.
All of these poverty amelioration programs have the impact of a thumb on the scale of labour valuation, preserving an oversupply, and encouraging the undervaluation of labour by employers. A mandatory minimum wage is a way of countering that thumb on the scale - of removing the subsidy, to a greater or lesser extent.
For the businesses that can pay their workers a living wage - their consumers are prepared to pay enough money for their products or services that they can operate profitably and their employees can reasonably subsist - there is no compelling public policy reason why our taxpayer- and philanthropy-funded programs should need to support those workers.
For the businesses that cannot pay their workers a living wage - if I pay my workers enough money for them to pay their own bills, I'll need to charge my customers amounts in excess of what they are willing to pay for my product - then, unless there is a compelling reason to directly and intentionally subsidize my business, my business probably should fail. Just like the one selling $10 widgets for $8.
Subsidies are not just expensive - such that we should not want our government writing blank cheques to subsidize businesses' undercompensation of labour - but they also create market distortions that ripple on a wider basis: When a subsidized product hits the market, it generates downward pressure on prices. Competitive products - created in a more efficient, cost-effective manner, pursuant to a business model that would be viable and sustainable in the absence of subsidies - have a hard time maintaining market share: You end up suppressing good, strong, desirable business models by artificially (and expensively) propping up weaker ones.
None of which is to say that there aren't businesses or industries that we might consider subsidizing. However, that is, and should be, a different debate: If the industry in which I operate simply can't sustain itself while paying my workers enough that they won't need public assistance, but there are compelling public policy reasons why society should want my industry to remain viable despite being uneconomical, then we might consider other direct or indirect industrial subsidies to offset the hardship of an elevated minimum wage.
In the final analysis, the core question of a living wage is this: When an individual is gainfully employed, engaged in remunerative labour that is profitable to his or her employer, do we believe that any shortfall in his reasonable ability to cover his own basic expenses should be the responsibility of the government? Or of the employer utilizing his labour?
The sensible conservative answer would seem to be the latter.
Conclusion
As we saw during the 20th century, a strong middle class drives a strong economy. Higher wages are better for society as a whole. Henry Ford understood this a hundred years ago: He dramatically increased the wages for his workers, on the premise that he wanted them to be able to afford the products they were making. He reduced their working hours, understanding that additional leisure time would improve business by increasing their consumption of goods. Ford grew one of the most successful businesses of the industrial era by pioneering some of the most progressive labour policies that we observe in contemporary industry.
There is one rule for industrialists and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible. -Henry FordAnd while fiscal policies to encourage business growth have their place, what we have seen over the last four decades is the theory of trickle-down economics, as a means of encouraging wage growth, gets easily gummed up by other distortions in the labour market: Since the 1980s, wages for most Canadians have been essentially flat, and yet the GDP per capita has nearly doubled in real terms. We need a fiscal and monetary policy that disincentivizes capital hoarding (creating what former BOC Governor Mark Carney calls "dead money"), and which gets a larger cut of Canadian prosperity into the hands of Canadian consumers.
A mandatory living wage, counteracting the downward pressure that existing subsidies put on market-driven wages, would be a good start.
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