Commentary,  Employment & Unemployment,  Wages

Learning from Minimum Wage History

This week Ontario increased its provincial minimum wage by a whole dime: from $14.25 per hour to $14.35. Don’t spend it all in one place, oh ye minimum wage workers. That 0.7% wage increase, saved up for a whole week for a full-time employee, will get you a small latte at Starbucks. Or, for those with humbler tastes, two whole double-doubles at Timmie’s.

Many commentators argued that such a stingy wage increase was offensive to the ‘essential’ workers whose humble but determined (and often dangerous) work is getting us through the pandemic: grocery store cashiers, building cleaners, fast food chefs, and delivery drivers. We learned that what they do is vital, demanding, and courageous. But that hasn’t translated into a commitment to ensuring they earn a living wage for their efforts. (I would have included the gig workers who bring fast food to your door in that list, except that – so far, anyway – they don’t even get a guaranteed minimum wage, being falsely excluded from this and other labour standards as ‘self-employed contractors’.)

At least Ontario increased its minimum wage – in line with provincial changes in the consumer price index. (The CPI was suppressed during the reference year by the pandemic, hence the ridiculously small wage adjustment.) In Alberta, there has been no increase in the minimum wage at all in Jason Kenney’s entire tenure as Premier. The minimum wage is stuck at the same level ($15) set by his predecessor, Rachel Notley, a few months before the 2019 election that elected Kenney’s UCP government. Kenney’s government actually cut the nominal minimum wage by $2 for young workers (to $13). And for all ages, the real value of the minimum is eroded steadily as inflation marches on. The same trick was pulled by Conservative Mike Harris (who froze the Ontario minimum wage for 8 straight years from 1995 through 2003), and by U.S. Republicans (who keep blocking Democratic efforts to raise the U.S. federal minimum, stuck at $7.25 for over 12 years now).

Indeed, in my experience, weakening minimum wages is a predictable policy touchstone for conservative governments. It is an easy gimme for their supporters in the business community. And it harmonizes nicely with their ideological commitment to ‘free markets’. After all, any Economics 101 student learns that if government messes with a market (say, by imposing a minimum wage on a labour market that would otherwise ‘clear’ at full employment), it ends up doing more harm than good. So conservative leaders routinely invoke rhetoric about enhancing competitiveness, letting markets do their thing – and how a low-wage job is better than no job at all.

The problem is that the economics profession long ago abandoned those tired supply-and-demand tropes. Research has identified all kinds of reasons why real-world labour markets do not function remotely like those idealized supply-and-demand cartoons: including the power of monopsony (large employers like Amazon and Walmart who can suppress wages across regional labour markets); labour market search behaviour (whereby workers will stick with jobs longer when the wage is more acceptable); and aggregate demand effects (whereby lower wages can undermine employment, not strengthen it, by reducing broader purchasing power). For these and other reasons, the simplistic prediction that higher wages means lower employment (and vice versa) is not a reliable guide to actual employment outcomes. And careful empirical evidence assembled from countries around the world shows that the impact of higher minimum wages on employment is negligible, and under certain conditions even positive. (Me and Jordan Brennan assembled Canadian evidence on this matter in our 2014 CCPA report.)

Never mind the sea-change in economic theory regarding minimum wages over the last generation. Just look out at the real-world economy today, and you immediately conclude that wages should be higher, not lower. Businesses complain loudly about their inability to recruit and retain labour (especially in low-wage, insecure jobs like hospitality and retail). Yet in the same breath they support freezing or even cutting minimum wages. The contradiction in that world view is obvious to most observers: if you really want to recruit and retain workers, try paying them more. And if that strategy is enforced across the labour market (through an economy-wide wage increase), then you don’t even have to worry about your competitors (because they have to pay the higher wage too). But don’t hold your breath waiting for consistency in a good business rant.

Ontario’s stingy 10-cent increase, and Alberta’s long minimum wage freeze, reminded me of an epic wager I once proposed regarding the effects of higher minimum wages on employment. (I am grateful to Canadian labour lawyer David Doorey for making this connection.) In late 2017, under more progressive governments, those provinces announced significant increases in their minimum wages. They were the first jurisdictions in Canada to meet the $15 target which is now a normalized benchmark (now backed up by $15 wages in B.C., the federal jurisdiction, and NWT). (In Ontario’s case, Doug Ford cancelled the planned step-up to $15 as one of his first acts, so that province still hasn’t got there.) 

The announcements in Ontario and Alberta were greeted with a tsunami of hostile reaction from business lobbyists, reinforced by ‘research’ from business-friendly think tanks like the C.D. Howe Institute and the Fraser Institute. Several studies were published predicting a huge loss of employment as a result of higher minimum wages. In a Globe and Mail column I critiqued these reports. None of them actually provided new research on the impacts of minimum wages on employment; rather, they simply applied coefficients gleaned from selected other studies (those which believe in a negative employment effect) to those two economies. I challenged the authors of 5 specific studies to a wager ($500 each) over whether employment in each province would increase or decrease in the year following the relevant minimum wage increases.

My point was not that minimum wage increases would cause employment growth – only that employment is determined by far bigger and stronger factors than wage regulation (such as investment, economic growth, and government policy). When the labour market is robust (as it was then) is the perfect time to push more benefits of employment and output growth downward to the low-wage workers who need it most. More details on the five authors, and the precise wager being offered, are provided here. So I was confident that employment would continue to increase after the minimum wage in increases.

No-one took me up on the bet – and good for them they didn’t. Employment did increase at a healthy pace in both provinces in the year following their respective minimum wage increases (see table), boosted by strong macroeconomic conditions. Those macroeconomic conditions were in fact incrementally strengthened by the extra consumer spending power resulting from higher wages at the lower-wage ends of the labour market. Employment grew for both full-time and part-time workers (the latter, supposedly, are more vulnerable to minimum wage disemployment effects). And the unemployment rate (which was not part of the wager) fell in both provinces.

I had pledged to donate my winnings to the Workers Action Centre in Toronto, which has done a magnificent job campaigning for livable minimum wages; absent any takers on the bet, I have at least donated my original ante ($500) to support their fine work. Meanwhile, the historical evidence continues to mount, reinforced by minimum wage improvements in other jurisdictions, that minimum wages can be increased without damaging employment. In B.C., for example, the minimum wage is now highest of any province ($15.20), yet B.C. also has Canada’s strongest labour market. The federal government is boosting the minimum wage in federally-regulated industries to $15 effective December 29. It needs to go higher, in more provinces.

History proves that in an appropriate context, backed by stimulative macroeconomic and investment measures, higher minimum wages are a powerful policy lever to reinforce growth – and, more importantly, ensure that its benefits are more broadly shared.

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.