Queen’s Global Markets A PREMIER UNDERGRADUATE THINK-TANK Economics of the Minimum Wage Is Ontario making the right move? Miriam Glustein, Mikhail Hudda, Matthews Joy, Eliano Rexho, Flurin Reiser, Terry Zhang 11.06.2017
Agenda What we will be discussing today 1 Introduction 2 Impact on Inflation and Unemployment 3 Positive Implications of Increasing the Minimum Wage 4 Alternatives to the Minimum Wage 5 Understanding Ontario’s Demographics 2
Introduction 3
The Plan What we know about the planned Ontario minimum wage increase The Timeline May 30, 2017 – Ontario January 1, 2018 – government announces Minimum wage minimum wage increase rises to from $11.40/hour $14.00/hour October 1, 2017 – January 1, 2019 – Minimum wage Minimum wage rises rises to to $15.00/hour $11.60/hour Political and Economic Landscape Demographic % of Minimum Wage Workers • Kathleen Wynne of the Ontario Liberal Party is Male 5.5% seeking re-election in June 2018 provincial Female 8.0% election • Ontario minimum wage rose to $11.60/hour Youths Age 15-19 50.2% from $11.40/hour in October HS Diploma or Less 20.4% • Ontario inflation rate at 1.7% (Canada – 1.6%) Retail Sector 17.4% • Ontario unemployment rate at 5.9% (Canada – 6.3%) Food and Accommodation 26.9% Source: Maclean’s 4
Overview of Traditional Arguments The pros and cons of a minimum wage increase Arguments For Arguments Against • • Wage gap will shrink Negative impact on inflation and unemployment • Everyone is provided with the baseline • necessary income to live Incentive for employers to replace human labor with automation • Could lead to more overall spending in • the economy Prices will increase and quality will derease to offset higher labor costs • Social programs would become less • necessary and taxes could go down Higher earners will ask for higher wages and lead to price inflation up the earning • Potential health, productivity, and ladder education gains 5 Sources: University of Wisconsin Press, University of Washington, Bloomberg, Upjohn Institute
Examining Existing Studies and Literature Flaws in Methodology? Aaronson, French, and McDonald Study 2008 Seattle Minimum Wage Study (UW) 2016 • • Sample is based on 7,500 food items at 1,000 Collected price data through a combination of different establishments from 1995 to 1997 online "web scraping" and in-person visits to area grocery stores, restaurants, and other retail • Flaws locations • Micro-industry approach leads to • Flaws conclusions that cannot be generalized • Excludes businesses with more than one • Lack of a specific control group location (48% of Seattle’s low -paid • Omitted multiple state metropolitan areas workforce) • 10% increase in minimum wage increases overall • Not yet peer reviewed restaurant prices restaurant prices by 0.7% • Lead researcher Jacob Vigdor likely biased as • 1.5% increase in fast food restaurants an opponent of minimum wage • 1.8% increase for fast food in low wage • Restaurant prices increased by around 4% regions • Unable to measure prices increases for groceries, • Conclude that restaurants pass full cost of gas, and rent but assume modest increases of 1% minimum-wage increases to consumers, but and 2% results were too imprecise to be certain 6
Impact on Inflation and Unemployment 7
Expected Inflation Inflation is a common argument against minimum wage increases, but there may be little truth to it Economic Theory • Many argue that minimum wage increases will inflate consumer prices • Employment elasticity is close to 0, so employment changes will likely be minor • Low-income spending is better for local economies than high-income spending • If minimum wage is increased in pace with inflation, it should have a minimal effect Phillips Curve • Inflation and unemployment have a stable and inverse relationship • Under this logic, economic growth causes inflation, which increases employment • This has been disproven (1970s) • More likely: a wage increase would hold employment constant to the long run trend • The natural rate of employment is determined by real macro factors Sources: BBC, The Economist, United Nations Source: Federal Reserve 8
Expected Inflation Inflation is a common argument against minimum wage increases, but there may be little truth to it Projected Increase in Canada’s Inflation Seattle Case Study 0.9% • Since the rise in 2015, unemployment has fallen and prices haven’t increased 0.7% • Each 10% increase in minimum wage raised pay in low-wage industries by 1-2.3% 0.5% • Some studies have shown a decrease in low- 0.4% wage employment but an increase in high- 0.3% wage • May harm low-wage workers and increase income inequality • Ontario’s wage increase is more aggressive TD CIBC CIBC (US) FAO CCEA Change in Prices Notable Side Effects • Elasticity of prices to minimum wage changes: • No evidence to show that the exit of businesses to 0.036 regions with lower minimum wages is significant enough to affect output prices • Small wage changes have a much smaller • Lower income households are more likely to spend impact than more significant increases their increased earnings • Shows that the market is monopolistically • Price increases generally occur in the same month competitive as the minimum wage increase Sources: BBC, The Economist, United Nations 9
Relationship between Nominal Wage and Inflation Regressing 30 countries’ data from 1960 - 2016 160.0% 120.0% Inflation % Increase 80.0% y = 0.0079x + 0.0769 40.0% 0.0% -80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% Nominal Minimum Wage % Increase (USD) -40.0% Sources: BBC, The Economist, United Nations Datasets collected from OECD 10
Relationship between Real Wage and Inflation Regressing 30 countries’ data from 1960 - 2016 150.00% Real Min Wage % Increase 100.00% 50.00% y = -0.2133x + 0.0825 0.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00% -50.00% -100.00% -150.00% Inflation % Increase Sources: BBC, The Economist, United Nations Datasets collected from OECD 11
Nominal Minimum Wage against Inflation No Correlation between Inflation and Nominal Wage Increases in Canada 12.00 14.0% 12.0% 10.00 10.0% 8.00 8.0% Nominal Minimum 6.00 CPI YoY Change Wage (CAD) 6.0% 4.00 4.0% 2.00 2.0% 0.00 0.0% 1970 1980 1990 2000 2010 2020 Min Wage log Inflation % Sources: BBC, The Economist, United Nations Datasets collected from OECD 12
Theoretical Impact on Unemployment Economic theory dictates that minimum wage raises will increase unemployment 7 Increase in Unemployment Deadweight Loss 7 Unemployment 6 Buyer 6 Real hourly wage ($) 5 Surplus Real hourly wage ($) 5 4 Employment Seller 4 Surplus 3 3 2 Deadweight 2 Loss 1 1 0 0 20,000 30,000 40,000 50,000 60,000 20,000 30,000 40,000 50,000 60,000 Unskilled labor (hours) Unskilled labor (hours) Labor Demand Labor Demand Labor Supply Labor Supply New Minimum Wage New Minimum Wage Sources: BBC, The Economist, United Nations 13
Youth Unemployment against Nominal Wage Comparing log differences of US youth unemployment against log differences US nominal wages 0.15 0.1 0.05 0 1950 1960 1970 1980 1990 2000 2010 2020 -0.05 -0.1 -0.15 Nominal Wage Increase Youth Unemployment Sources: BBC, The Economist, United Nations Datasets collected from OECD 14
Minimum Wage against Unemployment in Canada Regressing Canada’s provincial data on log differences of unemployment against minimum wage Log Difference Unemployment Rates 0.5 0.4 0.3 0.2 0.1 y = 0.2249x - 0.0011 0 -0.1 -0.05 0 0.05 0.1 0.15 -0.1 -0.2 Log Difference Nominal Minimum Wage Sources: BBC, The Economist, United Nations Datasets collected from OECD 15
Québec Case Study Background The Quiet Revolution Québec Government Expenditures versus Total Provincial Government Expenditures (1955-1970) • 1960 – Jean Lesage of the Québec Liberal Party 30000 4000 won the Provincial election and aimed on setting various social reforms Total Provincial Government Expenditures ($ millions) 3500 • Public sector saw growth throughout 1960s 25000 Québec Government Expenditures ($ millions) through initiatives such as the SGF (1962) and the 3000 nationalization of Hydro Québec (1963) 20000 • Provincial budget rose from $745 million to $2.1 2500 billion • Share of Québec public spending went from 4 15000 2000 percentage points below Canadian average in 1961 to 4 percentage points above by 1978 1500 10000 • Socialist policies continued under Robert Bourassa 1000 of the Québec Liberal Party in the 1970s 5000 500 0 0 Years Total government expenditures Quebec Expenditures Sources: BBC, The Economist, United Nations Source: Statistics Canada 16
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