Economics of the Minimum Wage Is Ontario making the right move? - - PowerPoint PPT Presentation

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Economics of the Minimum Wage

Miriam Glustein, Mikhail Hudda, Matthews Joy, Eliano Rexho, Flurin Reiser, Terry Zhang 11.06.2017

Is Ontario making the right move?

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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

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Introduction

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Political and Economic Landscape The Timeline

• Kathleen Wynne of the Ontario Liberal Party is

seeking re-election in June 2018 provincial election

• Ontario minimum wage rose to $11.60/hour

from $11.40/hour in October

• Ontario inflation rate at 1.7% (Canada – 1.6%)
• Ontario unemployment rate at 5.9% (Canada –

6.3%)

The Plan

What we know about the planned Ontario minimum wage increase

May 30, 2017 – Ontario government announces minimum wage increase from $11.40/hour October 1, 2017 – Minimum wage rises to $11.60/hour January 1, 2018 – Minimum wage rises to $14.00/hour January 1, 2019 – Minimum wage rises to $15.00/hour Demographic % of Minimum Wage Workers Male 5.5% Female 8.0% Youths Age 15-19 50.2% HS Diploma or Less 20.4% Retail Sector 17.4% Food and Accommodation 26.9%

Source: Maclean’s

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Overview of Traditional Arguments

The pros and cons of a minimum wage increase

Sources: University of Wisconsin Press, University of Washington, Bloomberg, Upjohn Institute

Arguments For Arguments Against

• Wage gap will shrink
• Everyone is provided with the baseline

necessary income to live

• Could lead to more overall spending in

the economy

• Social programs would become less

necessary and taxes could go down

• Potential health, productivity, and

education gains

• Negative impact on inflation and

unemployment

• Incentive for employers to replace human

labor with automation

• Prices will increase and quality will

derease to offset higher labor costs

• Higher earners will ask for higher wages

and lead to price inflation up the earning ladder

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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

different establishments from 1995 to 1997

• Flaws
• Micro-industry approach leads to

conclusions that cannot be generalized

• Lack of a specific control group
• Omitted multiple state metropolitan areas
• 10% increase in minimum wage increases overall

restaurant prices restaurant prices by 0.7%

• 1.5% increase in fast food restaurants
• 1.8% increase for fast food in low wage

regions

• Conclude that restaurants pass full cost of

minimum-wage increases to consumers, but results were too imprecise to be certain

• Collected price data through a combination of
• nline "web scraping" and in-person visits to area

grocery stores, restaurants, and other retail locations

• Flaws
• Excludes businesses with more than one

location (48% of Seattle’s low-paid workforce)

• Not yet peer reviewed
• Lead researcher Jacob Vigdor likely biased as

an opponent of minimum wage

• Restaurant prices increased by around 4%
• Unable to measure prices increases for groceries,

gas, and rent but assume modest increases of 1% and 2%

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Impact on Inflation and Unemployment

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Expected Inflation

Inflation is a common argument against minimum wage increases, but there may be little truth to it

Sources: BBC, The Economist, United Nations

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

Source: Federal Reserve

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Sources: BBC, The Economist, United Nations

Change in Prices

• Elasticity of prices to minimum wage changes:

0.036

• Small wage changes have a much smaller

impact than more significant increases

• Shows that the market is monopolistically

competitive

Notable Side Effects

• No evidence to show that the exit of businesses to

regions with lower minimum wages is significant enough to affect output prices

• Lower income households are more likely to spend

their increased earnings

• Price increases generally occur in the same month

as the minimum wage increase

Seattle Case Study

• Since the rise in 2015, unemployment has

fallen and prices haven’t increased

• Each 10% increase in minimum wage raised

pay in low-wage industries by 1-2.3%

• Some studies have shown a decrease in low-

wage employment but an increase in high- wage

• May harm low-wage workers and

increase income inequality

• Ontario’s wage increase is more aggressive

0.3% 0.9% 0.4% 0.5% 0.7% TD CIBC CIBC (US) FAO CCEA

Projected Increase in Canada’s Inflation

Expected Inflation

Inflation is a common argument against minimum wage increases, but there may be little truth to it

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Relationship between Nominal Wage and Inflation

Sources: BBC, The Economist, United Nations

y = 0.0079x + 0.0769

• 40.0%

0.0% 40.0% 80.0% 120.0% 160.0%

• 80.0% -60.0% -40.0% -20.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% Inflation % Increase Nominal Minimum Wage % Increase (USD)

Datasets collected from OECD

Regressing 30 countries’ data from 1960 - 2016

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Relationship between Real Wage and Inflation

Sources: BBC, The Economist, United Nations

y = -0.2133x + 0.0825

• 150.00%
• 100.00%
• 50.00%

0.00% 50.00% 100.00% 150.00%

• 20.00%

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00% Real Min Wage % Increase Inflation % Increase

Datasets collected from OECD

Regressing 30 countries’ data from 1960 - 2016

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Nominal Minimum Wage against Inflation

Sources: BBC, The Economist, United Nations

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 0.00 2.00 4.00 6.00 8.00 10.00 12.00 1970 1980 1990 2000 2010 2020 CPI YoY Change Nominal Minimum Wage (CAD) Min Wage log Inflation %

Datasets collected from OECD

No Correlation between Inflation and Nominal Wage Increases in Canada

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1 2 3 4 5 6 7 20,000 30,000 40,000 50,000 60,000 Real hourly wage ($) Unskilled labor (hours) Labor Demand Labor Supply New Minimum Wage

Sources: BBC, The Economist, United Nations

Theoretical Impact on Unemployment

Economic theory dictates that minimum wage raises will increase unemployment 1 2 3 4 5 6 7 20,000 30,000 40,000 50,000 60,000 Real hourly wage ($) Unskilled labor (hours) Labor Demand Labor Supply New Minimum Wage Increase in Unemployment Unemployment Employment

Buyer Surplus Deadweight Loss Seller Surplus

Deadweight Loss

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Youth Unemployment against Nominal Wage

Sources: BBC, The Economist, United Nations

• 0.15
• 0.1
• 0.05

0.05 0.1 0.15 1950 1960 1970 1980 1990 2000 2010 2020 Nominal Wage Increase Youth Unemployment

Datasets collected from OECD

Comparing log differences of US youth unemployment against log differences US nominal wages

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Minimum Wage against Unemployment in Canada

Sources: BBC, The Economist, United Nations

y = 0.2249x - 0.0011

• 0.2
• 0.1

0.1 0.2 0.3 0.4 0.5

• 0.1
• 0.05

0.05 0.1 0.15 Log Difference Unemployment Rates Log Difference Nominal Minimum Wage

Datasets collected from OECD

Regressing Canada’s provincial data on log differences of unemployment against minimum wage

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Québec Case Study

Background

Sources: BBC, The Economist, United Nations

The Quiet Revolution

• 1960 – Jean Lesage of the Québec Liberal Party

won the Provincial election and aimed on setting various social reforms

• Public sector saw growth throughout 1960s

through initiatives such as the SGF (1962) and the nationalization of Hydro Québec (1963)

• Provincial budget rose from $745 million to $2.1

billion

• Share of Québec public spending went from 4

percentage points below Canadian average in 1961 to 4 percentage points above by 1978

• Socialist policies continued under Robert Bourassa
• f the Québec Liberal Party in the 1970s

500 1000 1500 2000 2500 3000 3500 4000 5000 10000 15000 20000 25000 30000

Québec Government Expenditures ($ millions) Total Provincial Government Expenditures ($ millions) Years

Québec Government Expenditures versus Total Provincial Government Expenditures (1955-1970)

Total government expenditures Quebec Expenditures

Source: Statistics Canada

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Québec Case Study

The Wage Increase

Sources: BBC, The Economist, United Nations

The Québec Wage Increase

• Minimum wage rose from $2.10 to $2.80 from the

end of 1974 to the end of 1975

• 33% increase in the one year span
• Largest increase in the province’s history to date

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Real Wage Years

Québec Minimum Wage (1965-1985)

• Narrowing its wage gap with Ontario was a reason

behind Québec’s minimum wage hike

• Minimum wage went from 8% below Ontario’s to

23% above it

• 1975-1985 was the only period that Québec has ever

had a higher minimum wage than Ontario

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Real Wage Years

Québec and Ontario Minimum Wages (1965- 1985)

Québec Minimum Wage Ontario Minimum Wage

Relative to Ontario

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Youth Unemployment

• By 1977, unemployment for people aged 15-24

rose 6 percentage points to 19.5%

• Québec was the only province where youth

employment declined between January 1976 and December 1977

• Employment for all other age groups in Québec

grew by 2.2% in this period

Minimum Wage – Average Hourly Earnings Ratio

• Quebec’s minimum-wage-to-AHE ratio increased to

54.2% in 1975

• Only province with a minimum-wage-to-AHE ratio

greater than 50% (Ontario had 40.9% ratio)

• Only Canadian precedent of a minimum-wage-to-

AHE ratio above 50%

Québec Case Study

The significance of minimum-wage-to-AHE Provincial Government Response

▪ 1978 Pierre Fortin report issued by Québec found the minimum wage was detrimental to youth employment ▪ Determined that optimal method of maintaining high employment and improving wealth redistribution includes:

• a minimum wage to AHE ratio below 50%, and
• government transfers

10 20 30 40 50 60

Minimum-Wage-to-AGHE (%) Year

Québec Minimum-Wage-to-AHE (1965-2014)

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Long-Term Unemployment Subtopic

Québec Case Study

Ontario unemployment predictions based on previous cases

Sources: BBC, The Economist, United Nations

Elasticity Extrapolation – Fortin (2010)

• 10% rise in minimum-wage-to-AHE ratio reduced

employment of those aged:

• 15-19 by 5.3%
• 20-24 by 2.2%
• 25-54 by 0.6%
• This would translate to a loss of 124 000 jobs

from Ontario’s proposed legislation

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Percentage Years

Québec and National Unemployment Levels (1976-2016)

Québec Unemployment Canada Unemployment

• 10.00%
• 5.00%

0.00% 5.00% 10.00% 15.00% 20.00% 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Unemployment Rate Changes Nominal Minimal Wage Changes

Ontario Unemployment and Min. Wage

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Positive Implications of Increasing the Minimum Wage

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Poverty’s Rising Influence

• Inflation has been increasing over time
• Last minimum wage hike was in 2014
• $1 in 2014 is worth $0.96 now, giving the $11.40

that was minimum wage in 2014 less than $11 of purchasing power today

• More people living in relative poverty
• Ontario relative poverty is highest among single

parents, for which the gap has skyrocketed 200%

Impact on Poverty

A minimum wage increase is necessary to combat inflation and reduce poverty Effect of a Minimum Wage Hike

• Those at the poverty threshold are helped most

from minimum wage increases

• Arin Dube, an economist from UMass Amherst,

believes a 10% increase reduces poverty by 2.4%

• An increase to $15 would lift 100,000 Ontarians

above the poverty line

• 200

200 400 600 800 1000 5 10 15 20 25 30 35 40 45 50

Change in income, in 2016 dollars Family income percentile, adjusted for family size

Cash income Cash income + tax credits + non-cash transfers

Fed poverty threshold

∆ Family Income Percentile from 10% Minimum Wage Increase

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y = 0.0494x + 0.036

• 30.00%
• 20.00%
• 10.00%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

• 60.00%
• 40.00%
• 20.00%

0.00% 20.00% 40.00% 60.00% 80.00% 100.00%

Nominal Min. Wage % Increase (USD)

San Francisco Case Study

• When parents received wage

increases, their children:

• Completed 0.25 more years of

formal education, on average

• Were 34% more likely to

complete high school

• Were 22% less likely to have an

early or unexpected childbirth

Higher Education

Improvements in education make the economy more efficient Increased Income for Students

• 15-24 year olds, mostly

students, are 58% of minimum wage earners

• Generally from low-income

families to start with

• More able to save money for

higher education

Educational Improvements

• Currently, 54% of minimum

wage earners have earned a high school diploma or less

• 3% of minimum wage earners

have a university degree

• Education and training makes

the workforce and economy more productive

Sources: BBC, The Economist, United Nations Tertiary Education Enrollment % Increase

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California Wage Increase Analysis

• The minimum wage rise increased household

income, even after job loss was considered

• Effect on health was severe reductions of chronic

disease, mental and physical disability, alcohol and drug addictions, and obesity

• Reduced risk of premature death by 4-5%

Sources: BBC, The Economist, United Nations

Healthier Lower-Income Families

Improvements in health lead to lower social services costs Applicability to Ontario

• Reduces strain on social services and healthcare
• In most recent budget, Ontario healthcare costs

were $58 billion

• 42% of all public services costs
• 43% of healthcare costs go to hospitals
• The top 1% of users account for 33% of spending

5 10 15 20 25 30 0-99% FPL 100-199% FPL 200-299% FPL 300%+ FPL

Health Care Indicators by Family Income

5 10 15 20 25 30 35 40 45 0-99% FPL 100-199% FPL 200-299% FPL 300%+ FPL

% of Individuals Reporting Health by Family Income

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Alternatives to the Minimum Wage

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• The minimum wage concept is designed to allow one parent working full-time to support his or herself, his or

her children, and a stay-at-home spouse

• Easy to replace low-income families with numbers and statistics

Earned Income Tax Credit

• The EITC provides a tax credit for every dollar

earned by a worker in a low-income household, and it is refundable—so workers with no tax liability get a check from the government

• Increases employment because subsidized wages

increase incentive to work

• Taxpayers must foot the bill

Sources: Time, Futurism, Classroom

Ethical Concerns and Alternatives

Addressing the Living Wage Ethical Concerns

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000

Income Tax Credit Income

Universal Basic Income Examples

• Alaska’s Permanent Fund Dividend (PFD) derived

earnings from Alaska Permanent Fund (APD)

• Spending and saving increased
• Increase in purchasing power created 10,000

jobs

• Native American Poverty rate fell from 25% to

19%

• Namibia has set up Basic Income Grant Coalition
• Malnourished children fell from 42% to 10%
• Poverty rate has dropped from 86% to 68%
• Average earned income beyond UBI has

increased 29%

• Crime has dropped 36.5%

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Unconditional Basic Income (Switzerland)

Understanding UBI

Sources: BBC, The Economist, United Nations

Overview of UBI Overview of Switzerland

• Switzerland is located at the heart of Europe, but

not member of the EU

• Political system is called “democratic federal

republic

• Currently no minimum wage in Switzerland
• Great importance of collective labor agreements

Cost Estimation

164 70 36 270

Higher Taxes Welfare Institutions Uncovered Costs Overall Cost

*Costs are quoted in CAD (billions)

• Two financing structures
• Market socialism
• Capitalist system
• Purpose of UBI
• Reduce poverty
• Increase transparency
• Promote economic growth

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Unconditional Basic Income (Switzerland)

Arguments for and against UBI

Sources: BBC, The Economist, United Nations

Would UBI work?

• Supporting UBI
• Social, liberal benefits
• Democratic and emancipatory
• Easy to implement
• Problems with UBI
• Misaligned incentives
• Expensive and uncertain
• Welfare institutions can not be removed
• Leads to higher immigration

23% 77% Yes No

Referendum Results Switzerland does not want any experiments concerning the welfare institutions Purpose of Referendum

• Relatively broad formulation of the referendum
• Basic monthly income of 3 250 CAD for adults

(800 CAD for children) suggested

• Intention: Ensure humane life and enable

everyone to participate in the public life

• UBI would make minimum wage discussion

redundant

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Understanding Ontario Demographics

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Focusing on Ontario

“We don’t believe that anyone in Ontario who works full time should be struggling to pay their rent, put food on their tables

• r care for their families — especially when the provincial

economy is doing so well.” — Labor Minister Kevin Flynn

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Application to Different Economic Regions Subtopic Kaitz Index

Potential Effect of Minimum Wage

How the minimum wage hike will affect different earners in the province

Sources: BBC, The Economist, United Nations

Effects on Lowest Earners

• Only 1/7 minimum wage workers in Ontario live in

low-income households

• 60% are aged 15-24 and live with parents
• 19% of minimum wage earners are married with

employed spouses (90% of spouses earn more than minimum wage)

• Only 2% of minimum wage workers are single

parents with young children

• Scored between 0 and 1, where 0.5 is median

wage

• As the index exceeds 0.5, unemployment

increases

• Ontario is currently at 0.51 but is projected to be

at 0.64 by 2019 ▪ No other provinces are projected to be over 0.6

• Jurisdictions with relatively lower median wages

will experience higher unemployment than those with higher median wages

• Ontario is a large economy with various regional

labor markets that vary in performance

• An increased minimum wage will affect lower

earning industries, such as food and accommodation, far more than other industries

• Cities with lower median earnings will also be

more effected than those with higher median earnings

• Toronto ($30.40/hour) will be less effected than

areas such as London or Kingston-Pembroke ($25.40/hour)

0.59

0.49

Kingston Kaitz Index (2019) Toronto's Kaitz Index (2019)

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We believe increasing the minimum wage does not achieve the intended outcome of benefitting low- income families. It will potentially increase youth unemployment rates, and modestly increase inflation levels.

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Thank you!