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Josie Rudderham of Cake & Loaf in Hamilton decided to increase the wages of all their employees recently, up from $12 - $15 range to a better living wage of $15 - $18.Glenn Lowson/The Globe and Mail

Josie Rudderham can't live on $11.25 an hour and she doesn't think her bakery staff should have to, either.

"It's under the poverty line," said Ms. Rudderham, co-owner of the Cake and Loaf bakery in Hamilton. "These are people I have to work with every day and I have to look them in the face."

When Ms. Rudderham and her partner, Nicole Miller, started the bakery five years ago, their goal was to funnel profits into wages so that they could afford to pay more than Ontario's minimum.

"I'm the child of two social workers so I'm a bit of a socialist at heart," she said. "I wanted to provide meaningful employment for people – jobs people could stay at and still have families and still go on vacations and still buy houses."

Rudderham and Miller wanted to pay staff at least $14.95 an hour – the living wage for Hamilton based on calculations set for 2014 by the Ontario Living Wage Network and the Canadian Centre for Policy Alternatives.

The calculation, made every two years, includes groceries, rent, a transit pass, child care and extended health insurance for a family of four when both parents are working and making that wage.

It doesn't include saving for retirement, paying off debt, taking vacations or buying a home. In Ontario, 80 businesses have signed declarations saying they intend to pay employees a living wage.

"It's a fairly frugal calculation," said Tom Cooper, co-ordinator of the Ontario Living Wage Network. "It reflects what people need to earn just to get by."

Ms. Rudderham and Ms. Miller couldn't afford to pay staff that right away, but last October the two "felt we were financially ready."

The bakery increased wages for their 17 staff members to $15 to $18 an hour from $12 to $15. Managers earn more.

There wasn't much of an initial reaction, Ms. Rudderham said. "It wasn't that they rushed out and thanked us or anything," she said. "We said, 'We need you all to help us accomplish this because we have to meet certain sales goals.' "

But staffers with two jobs were able to quit their second jobs and came in less tired, Ms. Rudderham said.

Even though December is the bakery's hardest month with long hours and a lot of stress, "productivity went way up," she said. "It was subtle and people just seemed happier."

The conventional wisdom is that when businesses raise wages, that raises their production costs and then they have to raise prices – and then they get beaten out by their competitors and have to lay off staff, said David A. Green, an economics professor at the University of British Columbia.

But that doesn't seem to be the case, he said. Research shows that after minimum wages are increased, companies do hire less. But that applies only to teen workers, he said. "Once you get past 20-year-olds, the end result is that the employment rate has not really changed."

Surprisingly, research also shows that when the minimum wage goes up, the likelihood of a business laying off a worker in the next year actually goes down.

"We think it comes down to the idea that you can operate a firm in the same industry in very different ways," Prof. Green said. "Places like Costco, Lee Valley Tools and In-N-Out Burger in the U.S. have a reputation of taking care of their employees and intuitively, you think they'll get beaten out by places that don't, like Walmart – but they don't."

If you pay low wages, you save on labour costs day to day, but you get high turnover and employees who have no real reason to make your company succeed, he said.

"If you work at a place where you think there's a future, you have better morale," Prof. Green said.

Becky Reuber, a professor of strategic management at the Rotman School of Management at the University of Toronto, thinks that paying a higher wage gives a small business a better chance of hiring – and keeping – good employees.

She doesn't think a wage hike would guarantee better work from every employee. "If you're doing this to have people become part of the team and stay longer, then you want to make sure you're giving a raise to someone who's good and not someone who's calling in sick all the time or has weak customer skills," she said.

As long as a business has the cash flow to afford it, paying higher wages sounds like a "win-win," Prof. Reuber said.

But it costs more to live in some places and that will raise labour costs for businesses that want to pay living wages there, Prof. Reuber said. In Toronto, the 2015 living wage is $18.52 an hour. In Vancouver, it's $20.68 an hour.

Ms. Rudderham, who hopes to eventually pay staffers $20 an hour, said giving workers more is "fundamentally a matter of priorities."

"There are a lot of businesses where there's a lot of profit being made and it could be distributed to employees," she said.