Media Briefings

CANADA’S MINIMUM WAGE RESULTS IN MORE STABLE JOBS BUT FEWER OF THEM

  • Published Date: December 2013

An increase in the minimum wage in Canada results in fewer jobs for workers with relatively low levels of education, but those who do have jobs are less likely to be laid off. That is the central finding of research by Professors Pierre Brochu and David Green, published in the December 2013 issue of the Economic Journal.

Their study analyses a large dataset of Canadian workers between 1979 and 2008, a period in which minimum wages, which are set at the provincial level in Canada, were changed over 140 times. The researchers explore the effects of the minimum wage on employment in terms of both job terminations and new hires. Among the findings:

· A 10% increase in the minimum wage implies a 5% reduction in the probability that a newly hired, less educated worker will separate from his or her job in the next year.

· For workers over the age of 20, this is matched almost exactly by a corresponding decline in the probability that an unemployed worker finds a new job. For teenagers, the latter probability declines more.

· Thus, for older workers, the two effects offset one another and there is little impact on their long-term employment rate. For teenagers, the extra reduction in hiring implies that their employment rate declines.

· Most of the impact of minimum wage increases in reducing job separations (approximately two thirds of the effect) is due to a reduction in layoffs rather than quits.

· The impact of minimum wage increases in reducing layoffs could reflect firms screening applicants more carefully before hiring if they are going to be forced to pay a higher minimum wage.

· Alternatively, it could reflect firms being less willing to lay off workers because the cost of training and retaining their replacements has increased.

The minimum wage is a policy tool that has been used widely across developed economies as a means of battling inequality and ensuring that workers get a ‘fair’ wage in situations where they have little bargaining power. But any beneficial effect in raising wages must be balanced against the possibility that firms facing a higher minimum wage may employ fewer workers.

The focus of this study is on Canadian workers with no ore than a high school education since these are the ones for whom the minimum wage is most likely to be relevant. The researchers estimate the impact of the minimum wage on job separations by comparing changes in the probability that a newly hired worker remains in the same job in provinces with minimum wage increases to those without such increases.

Previous studies of the impact of minimum wages on the employment rate tend to find that raising the minimum wage can reduce employment for teenagers but has little impact on other workers. The results of this new study imply that minimum wages affect a larger part of the labour market than has previously been realised.

The fact that the overall employment rate for older workers changes little when the minimum wage changes has led many observers to conclude that minimum wages are simply irrelevant for these workers. Instead, this study finds that when the minimum wage is higher, all low educated workers face jobs that are more stable (in the sense that they are less likely to end in a layoff) but harder to get.

The authors comment:

‘Taken together, our results for less educated workers imply that an increase in the minimum wage results in more stable jobs, but fewer of them.

‘Thus, the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs.

‘What’s more, the debate is relevant for all of the low educated labour market, not just teenagers.’

ENDS

Notes for editors: ‘The Impact of Minimum Wages on Labour Market Transitions’ by Pierre Brochu and David Green is published in the December 2013 issue of the Economic Journal.

Pierre Brochu is at the University of Ottawa. David Green is at the University of British Columbia.

For further information: contact David Green via email: green@econ.ubc.ca; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).