By Michal Rozworski
I recently moved back to British Columbia from Ontario, a province that has just passed legislation to raise the minimum wage to $15 per hour within a little over the next 12 months. This is a bold and much-needed step, one brought about by the tireless organizing of low-wage workers and labour activists, but also one well supported by the latest economic research.
I was among 53 economists from across Canada who signed an open letter this June in support of Ontario’s plan to raise the minimum wage to $15 per hour. Signatories included David Green and Craig Riddell of the University of British Columbia, the former the author of an important recent study on the Canadian minimum wage, the latter a past president of the Canadian Economics Association. In the United States, 600 of our colleagues, including seven Nobel Prize winners, signed a letter urging their federal government to raise the minimum wage to $10.10 per hour, which in percentage terms is an even larger increase than B.C.’s shift from $11.35 to $15 per hour.
Myths busted
Historically, the argument against raising the minimum wage was that it leads to disemployment, that is reductions in hours or jobs among low-wage workers. This view has undergone a tectonic shift since the publication of Alan Kreuger and David Card’s landmark study Myth and Measurement two decades ago. We have more realistic models of the labour market that acknowledge the existence of market frictions and imperfect information. We also have more advanced statistical methods, better able to isolate the impacts of changes in the minimum wage from all the other things happening in the economy at the same time (e.g., recessions, migration or shifts in industrial structure that can also affect employment).
The empirical evidence from modern studies is clear: normal increases in the minimum wage have negligible to statically insignificant impacts on employment. This isn’t the result of a single study but a finding coming from meta-analyses that have compiled thousands of estimates of the relationship between changes in the minimum wage and employment as well as comprehensive analyses based on large national datasets.
What mechanisms could be behind this new, clear evidence? Economists have identified a number of factors, which working in concert explain why we should expect this result:
-a shift from a low-wage, high-turnover labour market to a higher wage, lower turnover labour market with more stable jobs and thus lower costs to employers;
-some redistribution between wages and profits, not unwelcome after several decades of a consistent downward trend in the labour share of GDP;
-more productive workers, which can result from higher paid workers putting in greater effort (economists call this efficiency wage theory);
-modest increases in prices at an economy-wide level, outweighed by increases in pay for a large portion of the wage distribution;
compensating effects on demand from the higher propensity to consume of low-wage, low-income workers; and
-a more compressed wage distribution — that is, a reduction in inequality.
Many of these mechanisms are beneficial on their own. More productive workers, more long-term employment and greater equality are welcome results. Most importantly, without significant costs in employment, the biggest benefit of this policy is clear: we can expect significant increases in pay for the lowest paid workers. In British Columbia, this means roughly 400,000 workers, more than one in five of those employed in this province, will see higher incomes directly from this policy. Nearly four out of five of these 400,000 are not the teenagers of past stereotypes about who’s earning the minimum wage.
An escape from poverty
We should also not be surprised to see a reduction in poverty from raising the minimum wage, another finding of recent economic research.
Let me highlight two results from a recent meta-analysis by Arin Dube, one of the foremost U.S. minimum wage researchers. He synthesized results from 12 of the most credible recent papers on the relationship between raising the minimum wage and poverty reduction, even including two from the best-known academic minimum wage sceptic, David Neumark. Dube found a 2 to 5 per cent decrease in the number of non-seniors living in poverty for every 10 per cent increase in the minimum wage, as well as increases in household incomes for the bottom half of households, largest among those in the bottom quarter.
Despite all of this evidence, there have been a number of heavily publicized analyses of Ontario’s plans to raise the minimum wage, with dire predictions centered on disemployment impacts. These analyses focus on potential economic costs from raising the minimum wage based on evidence from older studies and older theoretical frameworks. Those making the wildest predictions were met with almost unanimous scepticism and criticism by Canadian economists.
Most importantly, none of these analyses present new evidence; they merely extrapolate results from a selective reading of outdated literature to the Ontario labour force. In effect, they assume what they seek to prove.
These analyses are reminiscent of claims made before the last substantial increase in this province’s minimum wage that took place in 2011. Over 12 months, the B.C. Liberal government led by Christy Clark raised the minimum wage from $8 to $10.25. In relative terms, this boost was very similar to the coming increase to $15 in Ontario and that under consideration here.
In the lead-up to the 2011 increase, the Fraser Institute predicted massive job losses, in the tens of thousands, that would disproportionately hit teenage workers. After the dust settled, it turned out that disemployment among teenagers was a mere tenth of what the Fraser Institute had estimated, and even that may have had more to do with a surge in higher education than the minimum wage increase.
Decades of stagnation
Finally, let’s put an increase to $15 per hour in context. Adjusted for inflation, the minimum wage in British Columbia today is no higher than it was in the mid-1970s. That is four decades of stagnation. Meanwhile, labour productivity has nearly doubled and the economy, powered in part by low-wage workers, has grown substantially in real terms. Minimum wage workers have not seen the fruits of this growth.
Expressed as a percentage of the full-time median wage, a measure adopted by the OECD and many academics, B.C.’s minimum wage is low, hovering around 40 per cent. Bringing the minimum wage to $15 per hour in 2019 would leave it just above 50 per cent of the full-time median, a moderate level. Internationally, this ratio is in some places above 50 per cent or even 60 per cent, and such ratios will soon be found in jurisdictions moving to $15 per hour on this continent as well. This measure, sometimes called the Kaitz index, can be a useful benchmark for future increases.
Brisk timeline needed
All of these arguments should make it clear that a brisk timeline would be beneficial for low-wage workers in British Columbia. The important thing is that the government has already signalled that it will raise the minimum wage to $15 per hour. Of course, raising the minimum wage should be just part of a multi-pronged poverty reduction strategy, but it is an important part. No one, working or not, deserves to live in poverty. A higher minimum wage is one escape route out of poverty.
Businesses already have a head start on preparations. Remember that many supply shocks that hit businesses, both large and small, come with far less warning: consider the sudden swings in the price of oil on world markets or increases in commercial rents. Both impact the costs of a far greater share of businesses than do changes in the minimum wage and can be greater in terms of cost. We should have faith in the business sector’s capacity for entrepreneurship and its ability to manage a staged, forewarned increase in the minimum wage.
Many competitor jurisdictions will be at a $15 minimum wage or higher in the very near future. Alberta will be at $15 by October, 2018, Ontario by January, 2019. All businesses in Seattle will (given a stable exchange rate) be paying over the equivalent of $15 Canadian per hour by 2019 as well, with many well above that.
Opponents of raising the minimum wage or advocates for going so slow as to make any gains barely felt are swimming against the tide of economic evidence. Increasing the minimum wage is beneficial for workers and the economy. It is a boost that British Columbia sorely needs.
This post was first published on Ricochet