Minimum-Wage-Presentation · PDF file5 Overview of Traditional Arguments The pros and cons of a minimum wage increase Sources: University of Wisconsin Press, University of Washington

Queen’s Global MarketsA PREMIER UNDERGRADUATE THINK-TANK

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?

2

AgendaWhat 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

3

Introduction

4

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 PlanWhat 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

5

Overview of Traditional ArgumentsThe 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

6

Examining Existing Studies and LiteratureFlaws 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

online "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%

7

Impact on Inflation and Unemployment

8

Expected InflationInflation 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

9


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

10

Relationship between Nominal Wage and Inflation


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%

Infl

atio

n %

Incr

ease

Nominal Minimum Wage % Increase (USD)

Datasets collected from OECD

Regressing 30 countries’ data from 1960 - 2016

11

Relationship between Real Wage and Inflation


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%

Rea

l Min

Wag

e %

Incr

ease

Inflation % Increase


Regressing 30 countries’ data from 1960 - 2016

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Nominal Minimum Wage against Inflation


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 ChangeNominal Minimum

Wage (CAD)

Min Wage log Inflation %


No Correlation between Inflation and Nominal Wage Increases in Canada

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0

1

2

3

4

5

6

7

20,000 30,000 40,000 50,000 60,000R

eal h

ou

rly

wag

e ($

)Unskilled labor (hours)

Labor Demand

Labor Supply

New Minimum Wage


Theoretical Impact on UnemploymentEconomic theory dictates that minimum wage raises will increase unemployment

0

1

2

3

4

5

6

7

20,000 30,000 40,000 50,000 60,000

Rea

l ho

url

y w

age

($)

Unskilled labor (hours)

Labor Demand

Labor Supply

New Minimum Wage

Increase in Unemployment

Unemployment

Employment

Buyer Surplus

Deadweight Loss

Seller Surplus

Deadweight Loss

14

Youth Unemployment against Nominal Wage


-0.15

-0.1

-0.05

0

0.05

0.1

0.15

1950 1960 1970 1980 1990 2000 2010 2020

Nominal Wage Increase Youth Unemployment


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

15

Minimum Wage against Unemployment in Canada


y = 0.2249x - 0.0011

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

-0.1 -0.05 0 0.05 0.1 0.15

Log

Dif

fere

nce

Un

emp

loym

ent

Rat

es

Log Difference Nominal Minimum Wage


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

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Québec Case StudyBackground


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 of the Québec Liberal Party in the 1970s

0

500

1000

1500

2000

2500

3000

3500

4000

0

5000

10000

15000

20000

25000

30000

Qu

ébec

Go

vern

men

t Ex

pen

dit

ure

s ($

mill

ion

s)

Tota

l Pro

vin

cial

Go

vern

men

t Ex

pen

dit

ure

s ($

mill

ion

s)

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 StudyThe Wage Increase


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

19

65

19

66

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67

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68

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69

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79

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80

19

81

19

82

19

83

19

84

19

85

Rea

l Wag

e

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

19

65

19

66

19

67

19

68

19

69

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70

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74

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75

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79

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80

19

81

19

82

19

83

19

84

19

85

Rea

l Wag

e

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 StudyThe 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

0

10

20

30

40

50

60

Min

imu

m-W

age-

to-A

GH

E (%

)

Year

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

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Long-Term Unemployment

Subtopic

Québec Case StudyOntario unemployment predictions based on previous cases


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

19

76

19

78

19

80

19

82

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84

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86

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88

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90

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98

20

00

20

02

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04

20

06

20

08

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10

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12

20

14

20

16

Per

cen

tage

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

21

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 PovertyA 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

0

200

400

600

800

1000

5 10 15 20 25 30 35 40 45 50

Ch

ange

in in

com

e, in

20

16

do

llars

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

22

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 EducationImprovements 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


Tertiary Education Enrollment % Increase

23

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%


Healthier Lower-Income FamiliesImprovements 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

0

5

10

15

20

25

30

0-99% FPL 100-199% FPL 200-299% FPL 300%+ FPL

Health Care Indicators by Family Income

0

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

24

Alternatives to the Minimum Wage

25

• 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 AlternativesAddressing 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

Inco

me

Tax

Cre

dit

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%

26

Unconditional Basic Income (Switzerland)Understanding UBI


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 TaxesWelfareInstitutions

UncoveredCosts

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

27

Unconditional Basic Income (Switzerland)Arguments for and against UBI


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

28

Understanding Ontario Demographics

29

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 or care for their families — especially when the provincial economy is doing so well.”

— Labor Minister Kevin Flynn

30

Application to Different Economic Regions

Subtopic

Kaitz Index

Potential Effect of Minimum WageHow the minimum wage hike will affect different earners in the province


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)

31

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.

32

Thank you!

Documents

Minimum-Wage-Presentation · PDF file5 Overview of Traditional Arguments The pros and cons of a minimum wage increase Sources: University of Wisconsin Press, University of Washington