Canada

The great divide: Economists remain split on merits of minimum wage laws

For politicians, deciding whether to raise the minimum wage has always been the policy equivalent of jumping into a raging river to escape a rampaging black bear: Each option presents its own difficulties.
By July 2010, seven of Canada's 10 provinces will have raised their minimum wages in the current year.
For politicians, deciding whether to raise the minimum wage has always been the policy equivalent of jumping into a raging river to escape a rampaging black bear: Each option presents its own difficulties.

Don't hike the minimum wage and risk leaving society's lowest-paid to the tender mercies of a recession-ravaged private sector.

Boost the mandated rate, however, and threaten the economic recovery for some employers and, ultimately, the number of jobs available to these same workers.

Economists often form a general consensus on the most suitable policies, a major factor that can sway the public discussion.

Unfortunately, after 20 years of cutting-edge research using the most sophisticated mathematical techniques, practitioners of the dismal science remain split over whether a higher minimum wage reduces poverty or, perversely, eliminates jobs.

"There is by no means a 'definitive word' on this subject," says Kai Filon, a policy analyst with the Washington-based Economic Policy Institute, which specializes in labour issues.

Canada raises the ante

By July 2010, seven of Canada's 10 provinces will have raised their minimum wages in the current year, re-igniting the country's perennial discussion about the mandated pay rate and generating outrage from some business groups.

"At a time when we are trying to grow employment and rebuild our economy, dramatic minimum wage increases are entirely counterproductive," Stephanie Jones, Ontario vice-president of the Canadian Restaurant and Foodservice Association, said in April.

She was complaining about the Liberal government's raising of this wage on March 31 to $10.25 an hour.

Manitoba, Prince Edward Island, Quebec, Newfoundland, New Brunswick and Nova Scotia have either already hiked their mandated minimum wage or will do so in the next few months.

Only Saskatchewan and Alberta do not appear to have plans to boost the minimum wage, while British Columbia has had its mandated minimum frozen since 2001.

Long-running argument

For economists, the debate over the usefulness of hiking the minimum wage has remained stuck on the same issues ever since several Canadian provinces introduced the concept back in 1918 and U.S. president Franklin Roosevelt followed suit in the 1930s.

Essentially, the struggle over the minimum wage has been a fight over whether a higher wage for the lowest-paid — and often the lowest-productivity — workers will drive up the cost of those employees and result in layoffs.

"We shouldn't have a minimum wage. We don't need it and we'd have more employment if we didn't," Bill Dunkelberg, chief economist for the U.S.-based National Federation of Independent Business, said in the Newark, N.J.-based Star Ledger in 2009.

Indeed, the back-of-the-envelope logic that higher labour costs could result in fewer workers on the assembly line has swayed businesses and politicians for decades.

"As any Economics 101 student could tell you, if the price of labour increases, employer demand for labour will decrease," according to economist Dodson Strawbridge, writing in 2009 on The Foundry, the blog for the Heritage Foundation.

Interpreting the numbers

Problems arise, however, when common wisdom of the economics textbook clashes with empirical measurement.

While a higher mandated wage rate should theoretically result in observable job losses, convincing evidence of that phenomenon has been difficult to find.

And the inability to uncover bullet-proof data proving the case against a higher minimum wage raised questions in academic minds as to whether the mandated wage is such an  economic evil.

"The belief that raising the minimum wage causes job loss was more commonly accepted by economists decades ago, but high-quality research by leading academic economists has forced the economic community to re-evaluate these arguments," Liana Fox wrote in 2004 for the Economic Policy Institute.

A 2000 survey by the American Economics Association indicated that less than one-half of economists polled (46 per cent) believed a higher regulated wage would translate into fewer entry-level jobs. That percentage of economists opposing a minimum wage was down from 62 per cent a decade earlier.

In fact, more analysts argue that any negative effects from a higher per-hour stipend will be minimal and will get outweighed by improvements in living standards for those people receiving the minimum wage.

"[Minimum wage increases] raise the wages of the lowest-wage workers, many of whom reside in low-income families, and they do so without lowering their employment opportunities," said Jared Bernstein, a minimum-wage expert formerly with the Economic Policy Institute and now chief economist to U.S. Vice-President Joe Biden, speaking to a congressional committee in 1999.

Head-turning study

For many experts, the fork in the philosophical road regarding the minimum wage came in 1994.

In that year, economists David Card, a Canadian-born former adviser to U.S. president Bill Clinton, and Alan Krueger produced a study that indicated an increase in New Jersey's minimum wage led to a rise in employment in the fast-food sectors in that state and neighbouring Pennsylvania.

What had been a debate between economic principles — more jobs versus economic fairness — now became a nasty struggle between economists using esoteric mathematics and nasty rhetoric as their weapons of choice.

Academics now argue about whether a study uses data that is time-series (observations over a period) or longitudinal (studying a group of people or things at a point in time) in nature, or whether the elasticity — the relationship between demand of a product to its price — is positive or negative.

One reason for the renewed debate concerning the minimum wage is that the simple, dire predictions promised by economic theory have never really appeared.

For example, the U.S. Department of Labor said four American states currently do not have minimum wages — Alabama, Mississippi, South Carolina and Louisiana. Three of those states have unemployment rates in excess of 11 per cent, well above their 2007 levels. (Oil-rich Louisiana posted a March jobless rate of 6.9 per cent, almost three percentage points lower than the U.S. average.)

Now, take three states of a similar size but with a minimum wage higher than the federal rate — New Mexico, Nevada and Ohio. The average March 2010 jobless rate in those states — 11.1 per cent — was half-a-percentage point lower than the same measure for Alabama, Mississippi and South Carolina.

Such calculations are not terribly sophisticated but indicate the problems with relying upon uncomplicated theorizing to answer complex economic questions.

The upshot of this verbal war is that an economic problem that was once considered solved is now the subject to a reassessment by public policy types.

"My thinking on this has changed dramatically. The evidence appears to be against the simple-minded theory that a modest increase in the minimum wage causes substantial job loss," Alan Blinder, former Federal Reserve vice-chair and Princeton economics professor, said in 2006.

And that means Canada's economic debate over whether provinces should raise or lower their minimum wages is unlikely to ease anytime soon.