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Are You Prepared to Work 10 Hour Days for $2.50 Per Hour?

This term I’m teaching Industrial Relations, and there was a nice piece in the Toronto Star back in July to get us going.  The story described how some new immigrants to Canada are working 10 hour days and earning about $2.50 per hour  for sleazy employers in Toronto’s Chinatown area. Some also paid the employers a fee for the privilege of this employment. Is this a social problem in need of state intervention, or just the outcome of free bargaining between employers and employees?

We have a minimum wage in Ontario (it’s $10.25 per hour this year), and  $2.50 is obviously much lower

Exploitation in Chinatown

Exploitation in Chinatown

than that standard.   So the first lesson in this story is that employers do not always obey employment laws. In fact, we know from studies that employment standards laws in particular have a high level of non-compliance in Canada.  As Harry Arthurs says, “law is what law does”.  That reminds us that what matters is how actors respond to legal signals, not what the law “on the books” says.   The fact that we have a minimum wage doesn’t mean that the employers always pay it.  There is an enforcement and compliance problem.

But neo-classical economists are usually against the minimum wage (and laws regulating hours of work, human rights, et cetera too)  in any event.  State intervention in the “free” negotiation of employment contract is said to distort the natural equilibrium of the labour market, causing inefficiencies that actually harm both the employer and the employee.  If employees in Chinatown are prepared to work 10 hour days for $2.50 per hour, and the employer can attract sufficient workers at that rate, then that is the proper wage rate.  If the state tries to interject by ordering the employer to pay $10.25 per hour, the employer will just hire fewer workers (causing unemployment), or pass along the added cost to consumers (raising the cost of living), or they will just ignore the law altogether (as in this example).  In the words of  neo-classical law and economics professor Richard Epstein:

The minimum wage law, with its redistributive impulse, seeks to impose costs on one side of the relationship but ignores the private responses to the challenge, and so ends up hurting both sides. (Simple Rules for a Complex World, p. 145)

You can also watch the Guru of this world view, Milton Friedman, explain why the minimum wage is evil in this You-Tube video. The fact that new immigrants to Toronto likely don’t speak English, have no knowledge of the legal system, and are desperate for any source of income to feed themselves is assumed by people like Epstein not to pose a problem for the legal model they espouse.  In his view, employers like this who are not nice to their employees will be driven out of business by the forces of the market, since they will not be able to keep good workers, and word will get out that they are bad employers.  Soon, they will not be able to attract any decent workers, and their inefficiencies will drive them out of business.

Canadian governments have largely rejected these arguments.  Governments of all political stripes have historically supported employment regulation to “protect workers” from the harsh realities of the free labour market in which the employer so obviously holds the upper hand.  Governments have seen this imbalance of bargaining power as a social problem in need of a legal response.  That response has come in two forms:

(1) employment standards regulations (like employment standards, human rights codes, pay equity, occupational health and safety, workers compensation, etc); and

(2) collective bargaining laws that establish a system that allows workers to join together and bargain with their employers as a group so as to create a more level bargaining ground.

Industrial relations is the study of how these rules interact with labour markets and the industrial relations “actors” (employees, employers, unions, and the state) to produce  employment-related outcomes.  As we will see in my course, we are dealing with a virtual spider’s web of balancing,  tensions, and conflicts.  When we pull on one string, it provokes a chain reaction of cause and effects throughout the web.  That’s what makes the study of industrial relations so interesting.

These are the sorts of questions we will explore as we begin our foray into the study of industrial relations

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2 Responses to Are You Prepared to Work 10 Hour Days for $2.50 Per Hour?

  1. Machado Reply

    September 10, 2010 at 4:42 pm

    I am by no means completely informed, however, the questions posed are interesting.

    Typically very few people that were raised in Canada would work for less than minimum wage at any company. The $2.50 wage rate would be for new immigrants or illegal immigrants new to Canada, who are not familiar with the workplace legislation. To combat this, faster immigration/work permit processing times, increased education about workers rights in Canada.
    If we repeal the minimum wage and let the markets dictate, there would be a constant struggle of supply and demand. Employers will be looking to increase profits and pay employees as less as they possibly could. Employees would be constantly asking for more to keep up with costs of living. Would you be able to keep employees loyal to your organization? Would the market reach an equilibrium? I am not confident about that.
    I agree there should be a better way on how to ensure compliance with minimum wage. I am not sure how that would happen. I wouldn’t agree to making it easier for employees to unionize if their employer violates the employment standards. The labour board would be inundated with new union certifications, which would increase union activity through-out the Canadian workforce. There should be a way to ensure compliance without adding addition players into the mix. “Too many cooks, spoil the broth”.
    We should work with organizations to become more socially responsible so employees don’t need to unionize and can spend that extra effort doing the job they were hired to do.
    If the majority of the Canadian workplaces’ become unionized, would they still be as effective? Would there be need for another body to regulate unions and employers?

  2. Dennis Buchanan Reply

    September 11, 2010 at 9:32 pm

    I’m not going to get into the debate of whether or not we *should* have minimum wage laws, except to suggest that there’s no reason why abject poverty should need to exist in a country such as Canada, that removal of the minimum wage would *not* have more than a marginal effect on prices (as a consequence of several facts: that minimum wage labour costs are actually a small portion of the operating costs of even those businesses that use them; that most industries are not so competitive that businesses would be required to lower prices to maintain market share; and, relatedly, that prices are sticky downwards – the ratchet effect means that reduced costs tend to be swallowed up by increased profit margins), and that the huge disparity in the distribution of wealth makes it pretty unconscionable to suggest that – as far as product cost goes – we should try to save on the backs of the people who have least.

    Okay, so maybe I am getting into that a bit.

    Anyways, operating on the fairly uncontroversial assumption that minimum wage laws are good (notwithstanding the position of laissez faire capitalists like Friedman), the question of how we enforce it…

    …when you have *that* level of a disconnect between legislative requirements and employer conduct, availability of unions isn’t an issue. The issue is not bargaining power; it’s awareness of rights. A union is not necessary to correct that kind of deficiency; the Ministry would come down pretty hard following a complaint. The only thing we can do that would have any usefulness is promote awareness of rights, and also awareness of the recourse available for breach of rights.

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