Macroeconomic Effects of Canada's Minimum Wage Increases

There’s a lot of attention in the media right now about a research note produced by the Bank of Canada on the effects of Canada’s minimum wage increases on the economy. The CBC, the Toronto Star, and the Financial Post are all talking about one of the findings of the report: by 2019, the minimum wage hikes may result in the loss of approximately 60,000 jobs.

And although this sounds like a big scary number, I feel like a lot of the media outlets are ignoring a bigger context, and furthermore failed to mentioned the other findings of the report. As someone keenly interested in public policy and economic data, I wanted to take some time to break down the findings of their research note in this blog post.

Job Losses

Headlines about job losses certainly drive clicks, but two questions immediately arise from this estimate: is this loss significant in magnitude, and what are the long term effects?

The Bank of Canada used a structural general equilibrium model that suggests the wage hikes will result in a minor decrease in real GDP (-0.01%). Weaker labour demand would then reduce employment by 60,000 workers.

But is that significant in magnitude? The paper suggests that the result is statistically significant, which I think many people misconstrue as an implication on magnitude. In short, it doesn’t. In statistics, significance just means that a change in a variable (in this case a rise in the wage floor) has a non-random effect on other variables (employment in this case). Meaning the minimum wage rise will most likely have an observable effect on employment numbers, but doesn’t imply anything about how much relatively.

To put this in terms of magnitude, we can observe that the number of Canadians currently employed is roughly 18 million people according to Statistics Canada. With 8% of this workforce working in minimum wage conditions (meaning roughly 1.4 million Canadians), this puts the employment loss to be about 4% of minimum wage jobs and 0.33% of total jobs over two years. Considering in other impacts of the changes, the paper concludes at the end of the Annex 2 section, that the wage increases will have limited impacts on the national employment rate. These changes will still be meaningful to many Canadians, but at least it puts these numbers in context with the entirety of the labour force.

Another note is that these impacts will most likely be concentrated on youth employment, with no significant impacts on those aged 25 and above. This is definitely a serious policy implication in terms of future job prospects and career training for young people.

These results are also just in the short term (ie up to 2019), but what does the paper say in the longer term? Here’s what they had to say:

Longer-term effects are possible through automation, productivity gains or participation in the labour force, but the signs of these longer-term effects are ambiguous.

Or merely restated, there are too many variables to know with any certainty. Although there is some evidence by Sorkin in 2015 and some other researchers about long run impacts of minimum wage hikes, it is still inconclusive on what those might be.

Other impacts

There has been some concern that the minimum wage increases will see the cost of higher labour being passed on from corporations to consumers in the form of higher prices on goods and services. From radio pundits to casual observers, there’s a lot of worry that this may be a significant impact. Taking in simple economics principles this seems reasonable.

The paper actually addresses this in one of their sections: using their models it is estimated that the effect of the minimum wage increases on the Consumer Price Index inflation to be minimal (between 0.0 and 0.02 pp). The CPI is a government measure of the price of goods/services that the general Canadian typically consumes. The details of the different items used in this calculation and their weights can be found here. Overall, the idea that huge price increases will come in the wake of the minimum wage changes is hugely overstated in the media.

The note also reports that the raises will have a positive effect on labour income and that consumption will decline slightly with a higher inflation and interest rate.

Conclusion

In other words, there’s more to the minimum wage increases than just the headlines. I hope that clears things up. There’s definitely some things to be worried about like slightly higher inflation and the impact on youth employment, but I believe the impacts will be less than what news headlines will have lead you to believe.

Thanks for reading!