Canada Shows Minimum Wage Has Minimal Effect
Advocates of a $10.10 minimum wage say the move would "fundamentally change America" for the better. Opponents say it would "destroy" as many as 1 million jobs. The evidence from a country that has already tried it suggests both sides are mostly wrong.
In Canada, 2014 marks the first year that every province set its minimum wage at 10 Canadian dollars an hour or higher. Today the average minimum wage is C$10.37, up from C$8.26 at the start of 2009 -- which is roughly the value of today's U.S. federal minimum wage at current exchange rates.
That's a jump of about 25 percent -- not quite as much as U.S. labor advocates are seeking, but enough to ask whether Canada's experience can offer a lesson for the U.S. And that lesson seems to be that even if Congress can agree to pass the requisite legislation, don't expect it to change all that much.
Start with the scary stuff: Does raising the minimum wage kill jobs? It's hard to see any evidence of that in the Canadian unemployment rate, which peaked with the recession in 2009 and has crept downward since, though has yet to reach its pre-crash levels.
Even British Columbia, which raised its minimum wage from C$8.75 to C$10.25 from 2011 to 2012 -- the biggest increase of any province -- saw its unemployment rate fall by almost a full point over the same period, to 6.7 percent.
What about the upside -- did the increase in the minimum wage reduce the share of Canadians living in poverty? Sure enough, the percentage of people living in what Statistics Canada calls "low-income families" fell from 2008 to 2012, the latest year for which numbers are available.
But take a close look at the y-axis: Over four years, the share of people with low incomes fell just 0.4 percentage point, even as the minimum wage increased 16 percent in real terms during the same period. Moreover, some of that modest decrease was almost certainly due to the pickup in growth after the recession.
Of course, unemployment and poverty levels are blunt instruments for detecting the effects of raising the minimum wage, and they don't tell you how much of that was due to other factors. So I put the question to two economists who study this field.
"The link with poverty and the minimum wage is almost zero," said Stephen Gordon, an economics professor at the University of Laval in Quebec City. "Lots of people who earn the minimum wage are not in poverty, and a lot in poverty don't earn the minimum wage -- the problem is they're not working, or the number of hours they get."
The same is mostly true of the minimum wage's effect on employment, at least in the short term, according to Morley Gunderson, professor of economics at the University of Toronto.
"If you were a firm with a lot of low-wage labor, you're not going to say, 'Let's bring in the machines'," Gunderson told me. "But you'll do a slow adjustment process," such as moving toward fewer wait staff and more self-service.
Gunderson and Gordon each said that one section of Canada's labor market has suffered as the minimum wage has increased: young workers. According to Gunderson, the available data suggests that for every 10 percent increase in the minimum wage, teenage employment falls by 3 percent to 6 percent. For those in their early 20s, the effect is a little lower.
That might explain why many young workers haven't benefitted from Canada's economic recovery. The employment rate for those 15 to 24 years old was 4.6 percentage points lower last year than in 2008, and Gordon estimates that at least one-third of that gap is because of a minimum wage that's increased faster than inflation.
There's no guarantee, of course, that raising the federal minimum wage in the U.S. would have the same effect as it did up north. But the Canadian experience should encourage people on both sides of the debate to be less sweeping with their arguments, and to acknowledge that the minimum wage fight is as much about symbolism as it is about economic outcomes.
Not that there's anything wrong with that. The labor movement in the U.S. has lost so much ground that even a symbolic win could be crucial. And families whose main breadwinner makes minimum wage -- $15,000 a year for somebody working full time, $700 below the federal poverty line for a family of two -- deserve the raise.
But the lesson from Canada is that winning that battle won't make a big dent in the national level of poverty. It won't cause national calamity, either.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Christopher Flavelle at email@example.com
To contact the editor on this story:
James Greiff at firstname.lastname@example.org