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William Watson: Minimum wage hikes eat our young — and that's never a good strategy for survival
Tuesday, 9 January 2018 - 9:30am
We economists may not know much, but we do know the demand curve slopes downward. For anyone who dozed through Econ 100 — Happy New Year, Premier Wynne! — the demand curve relates a thing’s price to how much of it people buy. If you lower the price, people will buy more. There are exceptions, of course. For some goods, paying more is part of the good’s cachet. When the buyers of hundred-million dollar Rembrandts or Van Goghs sit in solitary contemplation of their purchases part of the satisfaction must be in knowing no one else in the world out-bid them. But for most things, demand curves almost certainly slope downward. In fact, it’s such a truism that when lay people hear us economists explain it, their reaction is usually: That all you got? Six-year-olds could understand that, if you didn’t cloak it in verbiage.
But if demand curves sloping downward is so trivial, why is there such a fuss when we apply the notion to the labour market? If you lower wages, however unprogressive that may sound, businesses will want to hire more workers. Non-businesses, like charities, NGOs and non-profits, will, too. Anyone with a budget will find it goes further when the price of labour is lower.
It works the same in reverse, of course: If you raise wages, anyone with a budget will want to hire less labour. Or, rephrase that, whatever they might want to do, they’ll have to hire less labour. With higher wages, some businesses will become unprofitable and go out of business. Others will change the way they do business and economize on labour, either by doing less of what labour did for them or by doing more of it with machines.
What we economists don’t have, unfortunately, is a precise answer when people ask: OK, so just how much does the demand for labour fall when wages go up, as they will do in a big way in four provinces that have increased their statutory minimum wages for this year and next? Hey, the world is complex, especially the future part of it, and employment bounces around for lots of reasons. Precise forecasts are hard.
But we can say something. The latest volunteers in this policy quiz show are four economists from the Bank of Canada who have written a “Staff Analytical Note” on the coming hikes in big-province minimum wages. Though the note’s cover page emphasizes how no responsibility for the views it expresses “should be attributed to the Bank” I’m betting it was vetted carefully.
What do the bank economists conclude? Yes, increases in minimum wages tend to be associated with reductions in employment, other things equal. But the coming wage increases are bigger in percentage terms (0.6 per cent) than the reductions in employment they’ll likely cause (0.3 per cent) so the net result is an increase in labour income. There will also be a small increase in prices — on the order of a tenth of a per cent overall — as firms pass along at least part of the wage bump. It’s small, though, because only eight per cent of workers are paid minimum wage while only 15 per cent or so seem to have their wages affected by it.
Some supporters of minimum wage hikes argue they’ll “help the economy” by encouraging consumption (as if people don’t consume enough already). Take money from people in general and give it to low-wage workers, the argument goes, and it’s going from savers to people who consume almost all they earn. But that argument suffers from severe time warp. It’s no longer 2009. The unemployment rate is at a 40-year low. We don’t need to boost consumption. Besides, the premise is wrong: Many minimum wage workers are middle- and higher-class kids. Even more critically, the bank economists find there’s no actual increase in consumption after you factor in a slight rise in interest rates resulting from the price inflation.
As to the apparently tiny — only 0.3 per cent — reduction in jobs. It’s 60,000 jobs and could be as high as 136,000 jobs. That doesn’t seem like much in an economy in which at last count 18.5 million people had jobs. But those who lose their jobs because of the wage hikes will be mainly young people. Last year saw robust growth in labour markets. Even so, there were only 30,200 new jobs for people 15 to 24 years old. So the hit from higher minimum wages could be two to four years’ growth of youth employment, not counting the effects of reduced labour-force participation by young people discouraged from looking for work.
Eating your young for the general good isn’t a winning strategy for any species.