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Yes, that part doesn't seem too bright, but it doesn't seem to be new either, just doing what they said they would do previously, and claiming (strangely) that it is a response to the recession.

The increased infrastructure investment seems sensible enough (if private construction decreases as they predict). I am intrigued by the $2,500 refundable tax credit for home improvements. I can't decide whether it is a sensible idea, but will personally take advantage of it. (I can never remember, does "refundable tax credit" means you get $2,500 off tax, or $2,500 off taxable income?)

I'm pretty sure it's the first thing, $2500 off taxable income would be a deduction. And that's a maximum; I understand you have to spend $12,000 or some such to reach that limit.

If you go by the U.S. as an example, when the federal minimum wage was increased from $5.15 to $5.85 per hour in mid-2007, employment for those Age 16-19 went from 6,198,000 in December 2006 to 5,822,000 in December 2007 (a drop of 378,000). That was a year in which overall employment grew from 145,989,000 to 146,294,000, overall economic growth was positive (expansion peaked in December 2007), and the percentage of working age teens with respect to the working age population (Age 16+) was unchanged from previous years (in other words, there weren't proportionately fewer teenagers.) Oh, and employers won't wait for the increase to take effect before beginning to shed the jobs - if they know the increase is coming, they'll start cutting back on any hiring plans now.

As for Nick's question, a tax credit should be taken directly off the income tax you pay. A tax deduction would be taken off taxable income. Unless you're in a higher tax bracket, the tax credit is the better deal.

"If you go by the U.S. as an example, when the federal minimum wage was increased from $5.15 to $5.85 per hour in mid-2007, employment for those Age 16-19 went from 6,198,000 in December 2006 to 5,822,000 in December 2007 (a drop of 378,000). "

$5.15 x 6.2M = $32M/hr at lower wage, to a socioeconomic class most likely to be without health insurance.
$5.85 x 5.8M = $34M/hr at higher wage, "" "" ""...

I like the redistrubtion where a 6.6% drop in employment yields 6.6% more cash; I think this wage earner class is ripped off in USA post-Reagan and I assume those unemployment have access to some retraining or welfare programmes; at least some states have a programme where you go on pogey 5 years max for your whole life and this is superior to MBs, Onts, and BCs welfare criteria. BC gives pogey to you always and offers retraining but makes you wait 3 weeks before collecting, MB gives it to you 1-2 times in your life, ON doesn't let you apply if you are living in a shelter, don't know about AB.
I'd guess in Quebec's case whether or not raising the minimum wage depends on what programmes and private opportunities are in place. I sure wouldn't want to make more people unemployed in ON if they are stuck in a shelter without any chance of climbing the ladder, but in BC (circa 2003) assuming you get by the 3 week window the living wage goal makes sense. If someone has never received pogey in MB, the higher wage makes sense. But if someone has already received it twice, in a Wpg winter, the higher wage would kill people.

Lowering the 50% capital gains tax exemption would also help labour.

...in Wpg there are rent increase controls so a living wage isn't as imperative here where you can rent a house for $500 as it would be in Vancouver where you need $600 to rent one floor of a house. Lots of supply side variables to consider; maybe time for economists and politicans to spend some time in some shelters.

Most tax credits are non-refundable, where the amount of the refund is capped at the level of tax paid otherwise.

A refundable tax credit can result in a negative tax rate for low income earners.

should have read "the amount of the credit is capped at the level of total tax paid otherwise"

Nick and Stephen: The renovation package is awful. It's a 20% tax credit on renovation work worth more than $7,500 up to a maximum of $2,500 (for a $20,000 project). As Jean-Robert Sansfaçon points out in Thursday's Le Devoir, a homeowner might as well bypass the program, choose to avoid taxes and pay a contractor under the table... the savings would be immediate whereas under the program, the tax credit is part of the 2009 Quebec tax return.

ClaudeB: Aha! And I see it's a 20% subsidy only on the amount above $7,500, which makes it a very non-linear subsidy (a kink at $7,500 and a second kink at $20,000). The second kink makes sense, if they want to spread the money around, and cap the total, but I don't see the rationale for the first kink.

Interesting to see the Paul Krugman reference and comparison to the US in the Le Devoir article. J-R Sansfacon seems economically literate.

Philip: You're incorrectly assuming that all these jobs are full-time. For the 16-19 year old age group, roughly 30% of jobs held are full time (> 35 hours worked per week) and 70% are part time (< 35 hours worked per week). Once you account for the coinciding reduction in hours worked, the 6.6% reduction in jobs isn't matched by 6.6% more cash.

As for health benefits, most teens are covered by their parents' benefits. Those who are eligible for such coverage from their employers usually waive it for that reason.

And before I forget - you're also forgetting the "sweep-up" effect - when the minimum wage increased from $5.15 to $5.85 in the U.S., the number of people earning it should have increased since you're also adding those who made more than the old minimum wage but less than the new one to the total. The number of job losses for those earning minimum wage is actually larger than indicated.

The rationale for the first kink may be to entice people to bring forward the timing of major projects.

anon: but why wouldn't the government want people to bring forward the timing of small projects as well? Why just medium-sized projects? That's what's puzzling me.

Seems designed to benefit upper middle class, to me.

I'm guessing that bang for the taxpayer buck was calculated as being greater for major projects. There's no cost for the government up to a designated trigger level, but once that level is triggered, the consumer is motivated to spend that level and more, in a sense to try and recover as much as possible from having decided to spend the first $ 7500 - a kind of leverage in the motivation to spend. This maximizes the government objective of fiscal stimulus while avoiding the cost on the first $ 7500. The consumer is paying a deductible in collecting on a fiscal insurance policy of sorts.

Although I don't doubt that increasing the minimum wage decreases the number of the employed, I'd be curious to see an analysis of how this interacts with unemployment insurance and other related benefits.

Would this have the effect of reducing the number of "working poor"? That category is people who are earning too much to qualify for any sort of government benefits, but too little to effectively partake in the overall economy. Certainly, a free market will correctly set prices. But a merchant should refuse to particpate in the market if the price is lower than their cost - I don't think anyone will disagree there. However, employment benefits are often conditional on people actually working if they can. In that case, raising the minimum wage is essentially making clear that there is a minimum "cost to live", and since we would penalize people for arbitrarily removing themselves from the market, we therefore set a minimum wage so that anyone participating in the market should be making enough to actually live on - if you can't get a job under those conditions (because nobody hires you) then you should be considered for unemployment insurance and skills upgrading.

In a way, this is akin to requiring motorcycle helmets because we have public health care.

By some measures, a family of four, with two working parents and two children, needs a wage of $16.60 per hour to reach this threshold in the city of Toronto - and, yes, that would amount to family income of approximately $65,000 per year.

A detailed, if someone hyped, backgrounder is here - http://torontoist.com/2008/11/toronto_continuing_to_eat_its_young.php - and here - http://www.policyalternatives.ca/reports/2008/11/reportsstudies2010/?pa=BB736455

A fully detailed analysis for those who want all the numbers is here - www.policyalternatives.ca/~ASSETS/DOCUMENT/Ontario_Office_Pubs/2008/A_Living_Wage_for_Toronto_Summary.pdf

The other thing this objection misses is the fact that some wages are set at "minimum wage plus". Minimum wage plus 25 cents, minimum wage plus $1, etc.

Those wages will also rise.

This is a Good Thing.

Ironman: Those calculations are all per hour. Unless those still employed get their hours cut back the total amount paid to workers rises. Given the cited stats we can't determine that.

Is there any evidence anywhere that increasing minimum wages reduces total output? If not clearly productivity is going up as a result.

I'm not aware of any evidence that this spillover effect is significant, and I've done a lot of homework on this subject. And in any case, it's a silly response to a recession. You might expect employers to eat a minimum wage increase when times are good, but not when they're laying people off as it is. Moreover, this 'extra buying power' is not coming from the government; the net effect on total spending is zero.

Transferring cash from employers to minimum wage workers has no effect on total spending? That would only be true if no employer was saving money (or at least they were saving less than the employees).

What's the evidence on total output effects? Do you know any research on that?

Firms don't save; people do. And since a large-ish fraction of minimum wage earners are high-school kids saving for post-secondary education, total savings may well increase.

The effects on total output are likely to be negative, because less employment leads to less output. Those effects are likely to be extremely small (the increase in the minimum wage is small), but it can't be considered a stimulus.

And can you elaborate your theory of what happens after the minimum wage goes up in a recession? Employers grit their teeth, leave employment and hours untouched and accept higher losses because - why, exactly?

I think the minimum wage thing has more to do with political pandering than with economics.

Oh, I agree. It's the political equivalent of busy work: it's at best pointless, but at least it shows that you're doing something.

If firms don't save what is the meaning of the phrase "retained earnings"? I would suggest that any theory that says firms don't save is insufficiently connected to reality to be useful.

Not all employers are the same. Even in a recession some are making lots of money. Some employers will be forced to accept lower profits. Some will look at their operations and say now that labour costs are up a bit it makes sense to buy that machine to improve productivity. Some will say I'm not making money at this point but if I hang tough the business will get better. Some will say enough of this, I'm outta here.

Overall higher wages drive higher productivity. Income support schemes should be increased at the same time as minimum wages since as work complexity goes up to support higher productivity more marginal people are forced out of the work force.

Retained earning belong the the firm's owners. But there aren't really going to be a lot of earnings to retain over the next few months, so it doesn't matter.

Not all employers are the same. Even in a recession some are making lots of money. Some employers will be forced to accept lower profits. Some will look at their operations and say now that labour costs are up a bit it makes sense to buy that machine to improve productivity. Some will say I'm not making money at this point but if I hang tough the business will get better. Some will say enough of this, I'm outta here.

That's not the same thing as saying that employment will be higher than what it would have been without the increase in the minimum wage. Or even the same.

Overall higher wages drive higher productivity.

Well, yes: as you fire workers whose productivity does not justify the higher wage, average productivity will rise. But what if you want to avoid layoffs? And what if you particularly want to avoid laying off the most marginal workers?

The Quebec govt already has the Work Premium; if it wanted to increase the buying power of low-income workers, it should have been increased.

No, when I said that higher wages drive higher productivity I meant that higher wages drive productivity investment, not that lower productivity employees get driven out. Sometimes that will happen, other times the volume of business will rise as total available output (by the firm) expands.

Income support increases should lead minimum wage increases. Income supports should be high enough that losing a minimum wage job should not be economically damaging to the worker.

You've got productivity-wage causality backwards. Do you really believe that the solution to (say) India's poverty is to increase minimum wages? Just who is supposed to provide the capital for all that investment spending?

Where did you get this idea, anyway? Do you have a reference? Because you must have gotten it wrong somehow.

"Overall higher wages drive higher productivity. Income support schemes should be increased at the same time as minimum wages since as work complexity goes up to support higher productivity more marginal people are forced out of the work force."

I think I was headed the same way. If we assume that people forced out enter training programs to increase their worth to employers, then raising the minimum wage could be seen to be driving the "employed" > "unemployed" > "trained" > "employed better" cycle.

Although it makes perfect sense from a pure market point of view to let wages be whatever the market equilibrium says they should be, some prices will just be too low for a person - so in that case, looking at all the parts of the system, aren't we better to try and structure the system so that they get enhanced training and re-enter the workforce for a higher wage?

Sure, but let's be sure not to put the cart before the horse. And I really question the wisdom of trying to apply that sequence just now. Forcing people out of low-paying jobs is cruel medicine when the economy isn't creating higher-paying jobs.

To respond to Stephen a couple of posts above.

Where did I get this idea?

A) Observation (both direct and as reported to me) of the decision making process in several real examples.

B) A Theory of the Firm that says firms try to maximize profits. In particular, firms only increase wages in the face of economic pressure to do so, if they increase productivity without upward pressure on wages they simply capture the increase as increased profits.

The investment in productivity decision is a four cornered dance between the cost of the investment, the cost of capital, the cost of labour, and the estimation of whether there is sufficient demand to absorb increased output.

What do the micro economic writers say about this decision making process anyways? How about the business schools?

As far as raising minimum wages in India goes, a minimum wage is a blunt instrument. I would suggest mass unionization with all of the unions bargaining for every last rupee they could get. Productivity would take off like a rocket.


Yes, but for the reasons I explained before: low-productivity workers would be unemployed.

Somewhere you seem to be assuming that employers feel compelled to hire all available workers at whatever the wage is, so we might as set the wage as high as possible. You're going to have to actually trace out the steps of that four-cornered dance and connect it to the data before it can be taken seriously as a basis for policy.

What do the micro economic writers say about this decision making process anyways?

They say what I said in the post: Labour demand curves slope down.

Slightly off-topic, but one day I must post on this:

"Labour demand curves slope down." I must be one of the very few semi-orthodox macro-economists who disagrees with this. I believe, in the very long-run, at the macro-level, on average, and holding quality of labour constant, that the labour demand curve is, approximately, ...........horizontal.

Peter Cook: "It is a little-known fact, that the whale is not a fish,...."
Dudley Moore: rolls eyes.
Peter Cook: ".....it's an insect!"

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