The minimum wage debate has heated up in Ontario given the Ontario Ministry of Labor’s Minimum Wage Advisory Panel is travelling the province looking for input on how to adjust the minimum wage in the province and sparking debate as to whether the minimum wage should be raised from the current general minimum of $10.25 per hour to $14.00. Yesterday, there were student demonstrations in Ontario and the one in Thunder Bay generated a news story that bumping the minimum wage to $14 an hour would inject 5.1 billion dollars into the economy.
We are all familiar with the basics in the minimum wage debate. Indeed, co-bloggers Frances, Stephen , Nick and Mike have all posted on this issue in the past. The standard economic theory argument is that all other things given an increase in the minimum wage will raise the wage above the market equilibrium and generate more unemployment – some due to layoffs and some of it due to new entrants to the labor market. Of course, the ultimate impact on unemployment will depend on the elasticity of the demand and supply for labor and the empirical evidence is mixed though you can find studies that show both positive effects on employment as well as negative effects. For an Ontario study, check out Gunderson (2007) (people at the Ontario Ministry of Labour might want to check out this study on the Ontario Finance Ministry site) and for an American study that also overviews international evidence check out Neumark and Wascher (2006). There is of course also work by economists such as Card and Krueger and Fortin and Lemieux. And there is a lot of literature – just type “minimum wage effects” into Google Scholar. There is also a set of arguments based on the minimum wage as a tool to reduce poverty and wage inequality but again Gunderson (2007) refers to this as a “blunt instrument for curbing poverty.” Direct and targeted income transfers would be a more effective means of alleviating poverty. Myself, I have always wondered why more effort was not expended on a “negative income tax” scheme.
However, the minimum wage as macroeconomic stimulus was a relatively new one for me. There is some literature on estimates of the positive macroeconomic impact of minimum wage increases and some of it quite recent. For it to work I would imagine that the income increase of those who still have employment after the minimum wage increase would have to exceed the income lost from those losing their jobs after the minimum wage increases. That is there would have to be a net positive expenditure impact. Of course the answer to that is also ultimately an empirical question depending on what you believe the employment effects ultimately are. So where did the estimate of a 5.1 billion dollar stimulus to Ontario’s economy come from? Well, to the best of my abilities, I was able to track it down to this flyer. It appears that the calculation is based on multiplying the number of workers on minimum wage in 2011 by the increase in minimum wage from $10.25 to $14.00. This is a rather crude attempt at estimating the stimulus impact of raising the minimum wage. It assumes no employment effects at all from the increase in the minimum wage – either positive or negative. If the authors of the flyer wanted to boost the economic impact, they could have assumed a positive employment effect and then even applied a simple multiplier to the 5.1 billion but perhaps they were trying to be conservative in their estimate – no pun intended. I think a much fuller and more comprehensive study of the stimulus effects of an increase in the minimum wage on Ontario's economy is needed. Moreover, as a policy measure to stimulate the economy, would minimum wage increases be superior to other stimulus measures such as tax decreases or increased infrastructure spending? Perhaps the people at Ontario's Ministry of Labour can ask the people at Ontario Finance to help out.