The minimum wage in Canada

By Paul Walker 25/02/2013

What we know about the effects of the minimum wage are largely based on work from the USA. But there is evidence from other countries including Canada. This 2005 report prepared for the Federal Labour Standards Review Commission by Morley Gunderson – CIBC Professor of Youth Employment at the University of Toronto, and a Professor at the Centre for Industrial Relations and the Department of Economics. He is also a Research Associate of the Institute for Policy Analysis, the Centre for International Studies, and the Institute for Human Development, Life Course and Aging. – reviews papers on the effects of changes in the minimum wage in Canada. A summary of the findings reads:

While there are substantial differences across the different Canadian studies, the following generalisations emerge:

  • The earlier Canadian studies (based on data prior to the 1980s) tended to find adverse employment effects that were in the range of US consensus estimates, and sometimes higher, where a 10% increase in the minimum wage would give rise to a 1-3% reduction in employment.
  • Studies based on data to include the 1980s tended to find smaller effects that were at the lower end of the consensus range, and possibly zero, as was often also the case in the US.21
  • However, some more recent studies using different and more sophisticated methodologies as well as more recent data (e.g., Baker, Benjamin and Stanger 1999, Yeun 2003, Baker 2005, Campolieti, Fang and Gunderson 2005a, b, Campolieti, Gunderson and Riddell, forthcoming) find larger adverse employment effects at the higher end and beyond the consensus range, especially in the longer run. The elasticities typically range from -0.3 to -0.6 for teens (slightly lower for young adults), implying that at 10 percent increase in the minimum wage would lead to a 3 to 6 percent reduction in the employment of teens. The fact that they use different data sets and methodologies suggest that these results are robust.
  • Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US.
  • Minimum wage increases also tend to reduce the labour force participation rate inducing some to leave the labour force and this means that not all of the employment reductions get translated into unemployment rate increases.
  • There is some evidence of wage spillover effects but not in all studies.
  • There is no substantial impact on schooling, although there may be some weak positive effect for older youths.
  • Although data problems preclude estimating robust results, the effects on training are generally negative, although sometimes small and statistically insignificant. The most likely negative effect, however, is indirect resulting from the more substantial adverse employment effect that precludes accumulating on-the-job training and experience.
  • Minimum wages tend to reduce wage inequality and disproportionately benefit low-income families. As an anti-poverty device, however, they are an exceedingly blunt instrument and not well targeted towards the poor for various reasons:
    • many of the poor do not work;
    • those that do often work few hours;
    • there is the risk of an adverse employment effect;
    • minimum wages disproportionately affect teens who are distributed throughout the family income distribution; and
    • minimum wages affect individual wages while poverty is defined in terms of family income and need.
  • There is, perhaps surprisingly, no direct published evidence on the differential impact of raising minimum wages in times of high unemployment or low unemployment. Basic theoretical reasoning (and the experience of Britain discussed previously) would suggest that any adverse employment effect would be mitigated if minimum wages were raised in periods of low unemployment in part because it would more likely not to be a binding constraint. As stated by Sussman and Tabi (2004, p. 6) in commenting that only 1.1% of workers in Alberta were working at the minimum wage compared to 4.1% across all of Canada and 8.5% in Newfoundland and Labrador: “more opportunities in Alberta may have translated into greater bargaining power for workers.” Certainly, any adverse employment effect would be masked by a tight labour market where its manifestation would be only slower employment growth.

Perhaps the most interesting result given the discussions on the effects of the minimum wage here in New Zealand is the comment that Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US. So the Canadian studies find stronger evidence for adverse employment effects of the minimum wage.

[EC: Editor’s note: See also Stephen Gordon’s recent review of the Canadian evidence. He finds that minimum wage increases at best do not reduce poverty and, at worst, increase poverty: while many minimum wage workers see a small wage increase, the ones who are thrown out of work are often the second earners’ who had helped keep their families above the poverty line. Kiwis wishing to cite evidence on minimum wages are entirely disingenuous when they cite American evidence (where minimum wages are about a third of the median) rather than Canadian or UK evidence, where minimum wages are closer to NZ’s relatively high level.]