Obstacles to business investment in Ontario—high labour costs

A recent study by the Fraser Institute showed that weak business investment remains a serious problem for Ontario’s economy, with important implications for the province’s medium- and long-term growth prospects. While the provincial economy has benefitted from a booming housing market in recent years, investment in other sectors has not recovered to pre-recession levels—the province will see $50.9 billion in business investment this year, compared to $53.8 billion before the recession.

The study documents several obstacles to increased business investment in Ontario. In this post, we focus on one of them—high labour costs.

Ontario’s unit labour costs (measured as a ratio, labour compensation to real value added) are the highest in Canada outside of the Maritimes.

And current government policy is likely to artificially drive labour costs in some sectors (especially hospitality and restaurants that rely heavily on lower-wage workers) higher still, above market rates. This could make it even harder for the province to attract business investment, with the effects more heavily concentrated in specific industries.

In May, the Wynne government announced it would raise the province’s minimum wage, which was already one of the highest in Canada, up from the current $11.40/hour to $14 in January 2018, and then to $15 by 2019. This represents a 32 per cent increase over just 18 months.

This rapid increase in the minimum wage will almost certainly make Ontario a less attractive destination in industries that rely heavily on less-skilled labour. Consider a recent study from the Harvard Business School that examined the impact of a minimum wage increase on Seattle’s restaurant industry. It found that a one dollar hike in the minimum wage increased the likelihood of firm exit (i.e. a business closing or leaving the jurisdiction) by 14 per cent for mid-rated restaurants. The changes also discouraged new firms from entering the market.

In addition to the minimum wage hike, the Ontario government also recently released a report promising a range of labour reforms, which could also increase the cost to businesses of employing people. These policy changes will give businesses that rely on inexperienced and less-skilled workers less incentive to invest or expand in Ontario as opposed to other jurisdictions.

Ontario needs a thriving business sector to help provide healthy, long-term, sustainable growth. But it will be that much harder to attract business investment if the provincial government enacts policies that raise the cost of doing business and make it harder for firms to survive and grow.