September 12, 2017

The Progressive Economics Forum: The headline you didn't see: $15 per hour will have a big net effect

By Michal Rozworski

You wouldn’t know it from today’s headlines about impending job losses, but an analysis of the impact of Ontario’s move to a $15 minimum wage from the province’s Financial Accountability Office shows a net benefit for Ontario workers.

Overall, this is a much more cautious report than what the Ontario Chamber of Commerce and its allies had furnished, noting both the costs and benefits of $15. While the media is focusing on job loss figures (more on this below), the report predicts a big overall rise in incomes. Even if we assume its job loss estimates come true, the FAO says real labour income will go up by 1.3% after taking into account any negative effects, with over 60% of that going to the bottom 50% of households.

Anything raising wages (*cough* CEO pay) will create impacts elsewhere. The important point here is that this report admits that $15 is a poverty- and inequality-fighting shift. Some jobs will be lost, but others will be created. (Lagging) productivity will rise. Even a very modest bump in inflation could push growth upwards. Today’s growing but imbalanced economy is well-placed for a boost for low-wage workers.

Returning to the job loss figure, the FAO report is another in a long line to present a skewed picture of minimum wage research, relying exclusively on the old view that features high estimates of job losses focused on teens. The recent, landmark Canadian study from David Green and Pierre Brochu (2013) is not mentioned — using modern methods, the pair found lower elasticity estimates (the percentage effect on employment for every 10% increase in the minimum wage) that would predict far lower job loss. Nor do the FAO economists mention the extensive work of Arin Dube and colleagues from the US, today’s leading minimum wage researchers. Dube and co. reevaluated US teen studies and found employment effects either effectively zero or very, very small — even among teens!

(It’s surprising, given the FAO’s focus on poverty, that they ignore Dube’s recent work on this issue as well, which found substantial decreases in the number of people living in poverty coming from minimum wage increases. In fact, it will be very interesting how the FAO calculated the distribution of income impacts and what they imply about poverty rates.)

Today’s new minimum wage research, if applied to Ontario would predict job losses anywhere from half of what the FAO is putting out to ten times smaller to nil (some studies, including well-known papers, have even shown small but positive aggregate employment effects). In short, there has been a tectonic shift in the economic consensus towards negligible job loss. This leads one to wonder how 50,000 jobs lost is to be a mid-point estimate.

Here is my main take-away: the FAO shows a $15 per hour minimum wage having a net benefit for Ontario workers and reducing inequality; that it ignores new minimum wage research only means that its already positive conclusions should be much stronger and job loss estimates lower.

Read the Progressive Economics Forum