Putting the minimum wage increase in perspective

On May 1, Manitoba’s minimum wage will rise by 25 cents to $8.75 per hour. Twenty-five cents might not sound like a substantial amount, but even these increases have a proven track record of sparking a debate along ideological lines about the merits and costs of the minimum wage.

One common argument is that raising the minimum wage is a bad idea because it will discourage companies from hiring. Another common argument is that raising the minimum wage is a good idea because it will encourage more consumer spending.

While left and right duke it out over this issues, it might be worthwhile to put the minimum wage in perspective.

How generous is Manitoba’s new $8.75 minimum wage?

While generous by U.S. and Japanese standards, the province’s minimum wage would appear to be a bargain in the eyes of employers in Australia and Luxembourg. As the following chart shows, the minimum wage is equivalent to slightly more than $12 Cdn. per hour in both of those countries, once differences in purchasing power have been taken into account.

What an hour's worth of work at minimum wage buys around the world

What an hour's worth of work at minimum wage buys around the world

However, the new $8.75 per hour minimum wage looks a bit better once compared to the cost of housing. The chart below is based on the estimated minimum monthly rent that a person would normally expect to pay for a one-bedroom apartment in various locations around the world, divided by the hourly minimum wage. (Admittedly, this is not a very scientific measurement — I simply took a quick look at the prevaling prices on various apartment-for-rent sites on the Web.)

One-bedroom apartments in Cork, Ireland and Toulouse, France are a little more within the reach of low-income earners than in Winnipeg — keeping in mind that a typical one-bedroom apartment in Europe is only between 500 and 600 square feet in size. However, Winnipeg is still a bargain compared to the West Midlands region of the U.K. (where the monthly rent on a one-bedroom apartment is about 112 times the hourly minimum wage).

Winnipeg is even a bargain compared to places that don’t suffer from European-style crowding, such as Christchurch, New Zealand (where rents start from 94 times the minimum wage) and Adelaide, Australia (88 times the minimum wage).

Housing affordability for minimum wage earners in Winnipeg and other secondary markets

Housing affordability for minimum wage earners in Winnipeg and other secondary markets

What does the research say about the minimum wage?

In 1946, economist George J. Stigler of the University of Minnesota began his analysis of the effects of the minimum wage in The American Economic Review with an observation that now seems quaint: “Many voices are now taking up the cry for a higher minimum [wage], say, of 60 to 75 cents per hour.”

Much has changed since 1946, when bread cost 10 cents a loaf and a new car cost a little over $1,000. Adjusted for inflation, this higher minimum wage of “60 to 75 cents per hour” would now be equal to “$6.50 to $8.20 per hour” in 2009. But the debate about whether the minimum wage is a good thing or a bad thing lives on.

    A 2009 study of how minimum wage increases impact the retail sector found “little evidence of disemployment effects once we allow for geographic-specific trends. Indeed, in many sectors the evidence points to modest (but robust) positive employment effects”.

    A 2008 study on the impact of the introduction of a standard national minimum wage in Britain found “evidence showing that firm profitability was significantly reduced (and wages significantly raised) by the minimum wage introduction.”

    A 2008 study of 73 economies (presumably countries) found that making it more difficult or complicated to hire and fire people tended to drive up unemployment rates, as did military conscription. However, minimum wages and the generousity of unemployment benefits had little effect.

    A 2007 study of what effect minimum wage increases had on employment in San Francisco’s restaurants concluded that a higher minimum wage “did not create any detectable employment loss” overall, and “a small price increase and substantial increases in job tenure” at fast-food restaurants.

    A 2007 study by the Federal Reserve Bank of Chicago found that “a 10% increase in the minimum wage lowers low-skill employment by 2%–4% and total restaurant employment by 1%–3%”

    A 1995 study published in the American Economic Review found that some job losses among low-wage, low-skilled labourers can be attributed to higher minimum wages.

    A 2002 study of the effect of minimum wage increases in Portugal found evidence that an increase in the minimum wage could discourage young workers from job-hopping: “…[J]ob attachment for low-wage youngsters may rise following an increase in their minimum wage, reducing the high job turnover that is characteristic of low-wage workers.”

    In 2001, the New Zealand government lowered the age at which workers become qualified for the adult minimum wage from 20 years of age to 18 years, effectively giving that country’s 18 and 19 year olds a minimum wage increase. A subsequent 2004-05 study found that there was “…no evidence of adverse effects on youth employment immediately following the reform, but some weak evidence of employment loss by 2003”.

    A 1995 study published in the Journal of Human Resources found that a minimum wage increase way back in 1979-80 had a mildly negative effect on the employment of young people: “[W]e find that employed individuals who were affected by the increases in the federal minimum wage in 1979 and 1980 were about 3 percent less likely to be employed a year later, even after accounting for the fact that workers employed at the minimum wage may differ from their peers in unobserved ways.”

    A 1994 study in the Industrial and Labor Relations Review found that there was “no evidence of an increase in employment resulting from the weakening bite of the Wages Council minimum pay rates” and that “the minimum wage had either no effect or a positive effect on employment”.

Putting it all together

My conclusions are:

    Manitoba’s minimum wage is not particularly exorbitant by international standards, though it should also be kept in mind that housing costs in Manitoba are also fairly low by international standards.
    International research shows that substantial minimum wage increases sometimes have modestly negative effects (e.g., slightly higher levels of joblessness among the young and unskilled, and either lower profitability or slightly higher prices) and sometimes modestly positive impacts (e.g., less staff turnover). Given that Manitoba’s minimum wage is only going up by a mere three percent, we shouldn’t expect anything significant to come from it.
Advertisements

About theviewfromseven
A lone wolf and a bit of a contrarian who sometimes has something to share.

2 Responses to Putting the minimum wage increase in perspective

  1. Nice work putting this data together. The minimum wage debate is one that comes back regularly.

    I was involved in a somewhat heated debate on the minimum wage in the comments section of a recent Rise and Sprawl post:
    http://riseandsprawl.blogspot.com/2008/12/more-minimum-wage.html

  2. theviewfromseven says:

    Thanks!

    I was involved in that same debate, and remember it well.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: