There has been ample media coverage of the well-deserved award of the Nobel Prize in Economics to Canadian David Card, in part for his work on the impacts of the minimum wage. As Andrew Coyne noted in the Globe and Mail, however, Card's work requires interpretation.
Card studied the impacts on employment of a small minimum wage increase in New Jersey in 1992 compared to adjacent Pennsylvania which did not raise its comparable low minimum wage. The key finding was that there was no negative impact on minimum wage jobs in New Jersey, contrary to the mainstream economic orthodoxy of the day.
Many subsequent studies have confirmed that modest increases in the minimum wage from low levels indeed have little or no impact on jobs. The most plausible explanation is that, left to their own devices, employers set the wage at too low a level. A wage increase can pay for itself by reducing very high turnover in low-paid jobs and associated recruitment and training costs.
Further, employers can respond to a minimum wage increase by accepting a somewhat lower profit margin, or by raising prices, rather than by cutting jobs.
Some thirty years after Card's study, economists take a much more nuanced view of minimum wages.
It has come to be recognized that higher minimum wages can be a significant tool to raise productivity, defined as the value of output per hour worked. Higher productivity can justify higher wages, increasing the quality of jobs.
Imagine you are in a minimum wage job paying $10 per hour and that you work 30 hours per week, earning a total of $300. If the minimum wage is hiked by $1 per hour, your earnings would rise to $330.
Suppose the employer responds by investing in new machinery and training to raise output per hour, and cuts hours from 30 to 28. In that case, the worker still gets a pay increase, from $300 to $308, and gains two hours of time to work elsewhere.
At the economy-wide level, higher productivity can mean fewer low-wage jobs without causing high unemployment.
In the Scandinavian countries, about 10% of all workers are in low-paid jobs, defined as earning less than two-thirds of the national median wage, compared to 20% in Canada. Unions and labour market policies such as high minimum wages can set a high wage floor without raising unemployment. Workers in low-wage sectors like fast food and hotels earn much more per hour than in Canada.
Our goal should be decent wages for all workers. The way to get there is to push for higher productivity in low-wage sectors by raising wages while maintaining full employment. That is precisely the formula pioneered by Sweden which remains relevant today.
Earlier this month we welcomed Professor Mariana Mazzucato to the Progress Summit stage. The event focused on innovative approaches to steer the economy and society towards an equitable and sustainable future. Professor Mazzucato drew on her recently released book, Mission Economy, to speak about how we can restructure the economy to tackle the biggest challenges of our world. Below is an excerpt from Mission Economy that delves a little deeper into the issue. For more from Professor Mazzucato on this topic, watch her session at our recent Progress Summit event.Read more
Newly appointed minister of finance Chrystia Freeland faces the daunting task of putting Canada on the path to a more sustainable and equitable future. Inevitably, even while rightly continuing to run a large deficit for now, she will have to make some tough choices between competing, urgent priorities.Read more
Developments in the Canadian economy have forced an important re-thinking of the respective roles of monetary and fiscal policy in supporting stable growth and job creation. But mainstream thinking about monetary policy has evolved much further than that on fiscal policy.
Before the great recession of 2008, fiscal policy had fallen greatly out of favour as a tool for macro economic stabilization. The conventional wisdom was that central banks could adjust short term interest rates to keep the economy growing more less at potential with low inflation, and indeed there was no recession from the early 1990s until the financial crisis of 2008.Read more
Celebrated political theorist and socialist historian Ellen Meiksins Wood passed away at her Ottawa home on Thursday at the age of 73 after battling cancer. Ellen is survived by beloved second husband Ed Broadbent, founder and board chair of the Broadbent Institute, and brothers Peter Meiksins of Cleveland and Robert Meiksins of Milwaukee. She was predeceased by her first husband, Neal Wood (1922 – 2003).Read more
My grandmother used to tell me that "nothing worth doing ever comes easy."
Well, a national, quality, affordable child care program is unquestionably worth doing. And come easy it won't.Read more
Many economists, particularly those that are male, find it difficult to understand the public interest in providing funding to child care.Read more
Rhys Kesselman / iPolitics
The federal government has delivered on the first of its two major tax promises from the 2011 election campaign. Income-splitting has been extensively assessed and widely criticized for its revenue cost, its tilt toward higher-income families, and its failure to accomplish anything beneficial for the economy.Read more