Brian Lee CrowleyPoliticians like Ontario Premier Kathleen Wynne who support a carbon tax and a minimum wage increase are caught in an unresolvable contradiction, writes Brian Lee Crowley.

By Brian Lee Crowley, June 9, 2017

At first blush you might think that carbon pricing and minimum wages have nothing to do with each other.

You’d be wrong.

Putting a price on carbon is a strategy inspired by the economic way of thinking. The argument is that carbon spewed into the atmosphere creates costs for everyone else, so the people burning the carbon should in effect have to pay to clean up the damage. Even more importantly the thinking is that the price of carbon, being too low, encourages people to use more carbon than they would do if they were paying its full cost (including cleaning up the environmental damage).

In fact one of the key arguments for carbon pricing is that raising the cost of carbon will make previously uncompetitive energy sources like solar and wind more price competitive as people respond to higher carbon prices by trying to substitute newly cheaper alternatives. That’s what such incentives are for: they reward entrepreneurs and innovators who come up with clever ways to do things in a more economical way than before.

The most powerful thing prices do is to send signals to buyers and sellers about the state of supply and demand.

Clearly Ontario Premier Kathleen Wynne believes in the power of carbon pricing. She is collaborating with other jurisdictions on a so-called “cap and trade” system that will use market mechanisms to generate a higher price for carbon to achieve exactly the effects I’ve listed above. She believes that higher carbon prices will reduce fossil fuel use and reward the use of alternatives.

Ergo she must believe in the power of prices to alter human behaviour, just as she must believe in one of the most fundamental propositions of economics, that if you raise the price of something, people will buy less of it. In fact I would make the case that the most powerful thing prices do is to send signals to buyers and sellers about the state of supply and demand.

If the price of something (fuel, clothes, data services) rises, the market is signalling that we should try and reduce our use of those commodities because there wasn’t enough to go around at the previous price. On the other hand, falling prices encourage us to buy more. That’s why prices play a powerful co-ordinating role in human activity because we respond intelligently to the information they are signalling to us.

Here is the problem. If she believes in all these things, as she says she does, she cannot simultaneously believe, as she says she does, that putting up the minimum wage by 30 percent won’t harm those people who work at the minimum wage.

Wages are just the name we give to the price of labour. And anyone who understands the power of prices to affect human behaviour knows that putting up the price of workers at the bottom end of the wage scale will have certain foreseeable consequences.

They are exactly the consequences predicted for putting up the price of carbon.

Seeing that it will be more expensive to hire low wage workers, employers will see a signal that they should reduce their reliance on such workers, especially ones whose productivity will not compensate employers for the wage they must now pay. That means the effects will fall most heavily on the weakest workers, such as those with some kind of productivity-lowering disability or young people with no job experience or new immigrants with weak language skills.

Putting up the price of workers at the bottom end of the wage scale will have certain foreseeable consequences.

Then there’s that pesky substitution effect. Just as carbon pricing creates incentives for innovators to come up with substitutes for carbon, a higher minimum wage gives incentives to those same innovators to find substitutes for low-wage labour. Previous minimum wage increases have already hastened this process, which is why those low wage jobs that used to be so plentiful have been automated out of existence.

When was the last time you dealt with a parking lot attendant or a car washer, let alone an elevator operator? Soon fast food, which provided a lot of entry-level employment, will be equally heavily automated.

It is these predictable economic effects, falling hardest on those with the fewest employment prospects, that led not one but two Ontario government expert panels to recommend against increasing the minimum wage. The authors of these reports were presumably unimpressed by the arguments of the minimum wage hikers that somehow, magically, people won’t react to putting up the cost of labour in exactly the way the same governments expect them to react to putting up the price of carbon. The Canadian data even put a number on it. For every ten percent the minimum wage increases, teenage unemployment will rise three to six percent.

Premier Wynne can either believe in the power of rising carbon prices or she can think rising minimum wages won’t cut employment. She cannot, however, believe both at once.