Essay
Effect of Minimum Wage on Employment
Bachir P. El-Rassi
Royal Military College
Abstract
This essay briefly reports on findings of research done on the effects of minimum wage on various
measures like employment (dis-employment), CPI, GDP and the age group of workers, industries
and skill level of workers most affected. Most research have contrasting results where some claim
that raising the minimum wage will have immediate negative effect on the employment of teens
and recent immigrants specifically the unskilled ones. Others like Card and Kreuger (1992 and
2000) showed that a raise in the minimum wage can have a positive impact on employment which
was supported by a later study but isolated to small restaurants and not fast-food chains.
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1.
Introduction
A minimum wage is the lowest wage that employers may legally pay to workers. Minimum
wage has those who advocate for it and others who oppose it. The most obvious advocates are the
direct beneficiaries, the employees, at least the ones that do not lose their job as a consequence of
implementing or raising the minimum wage. The argument is that the raising of the minimum
wage will increase earnings, increase total demand for goods and services, reduce inequality and
reduce employee turnover (Bradley, p. 6). The opposition are the businesses that will now have
higher costs and lower profit margins or maybe even go bankrupt. The argument is that the raising
of the minimum wage will not reduce poverty, will reduce employment, will increase prices and
reduce profits. The government can be either an advocate or an opponent depending on whether it
raises the overall tax collection and / or it is used as a political move to appease the masses and
roll in more votes.
The rest of the paper is divided into sections. The second section will provide a brief general history
of the minimum wage followed by the history in the United States (US) and in Canada since these
two countries share many economic similarities, living standards and policies. The third section
contains a summary of recent literature from Canada, US and international academics that
evaluated the effects of minimum wage on employment. Two Canadian articles will be discussed
in more detail than others due to the fact that they do a comprehensive research on the effect of
minimum wage on employment in Canada. These are by “Rybczynski and Sen” and Shumakova.
The last section is the conclusion.
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2.
History
2.1.
General
Wikipedia.org1 traces the history of the modern minimum wage laws to the Ordinance of
Labourers in 1349. After the black plague killed many people in 1348, labour shortage caused
wages to soar and the ordinance by King Edward III set a wage ceiling. In 1389, it was amended
to set wages to the price of food and kept on evolving until eventually King James I passed an act
to set a formal minimum wage for workers in the textile industry in 1604. As of 2013, the hourly
minimum wages in the Organization for Economic Cooperation and Development (OECD)
developed countries range from $0.62 in Mexico, up to $15.61 in Australia. Canada’s was $9.85
which is just above the UK, Japan and US and just below some European countries. An interesting
and valuable ratio to consider is the minimum wage divided by the average wage for the same
OECD countries. Canada’s ratio is in the middle at 0.39 with Mexico and the US taking the lowest
spot at 0.27 and New Zealand leading with a ratio of 0.51.
2.2.
United States
Wikipedia2 says that New Zealand was the first country to enact a national minimum wage
in 1894 by the Industrial Coalition and Arbitration Act that established arbitration boards to
enforce compulsory arbitration. The Center for Poverty Research at the University of California
published on their website3 this brief history of the minimum wage in the US. In 1938, The Fair
Labor Standards Act (FLSA) was enacted nationally and it set the minimum wage initially at $0.25
per hour for covered workers. The FSLA provided a number of federal protections for the first
1
https://en.wikipedia.org/wiki/Minimum_wage#Debate_over_consequences
https://en.wikipedia.org/wiki/History_of_the_minimum_wage
3
https://poverty.ucdavis.edu/faq/what-history-minimum-wage
2
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time including: payment of the minimum wage, overtime pay for time worked over a set number
of hours in a work week, restrictions on the employment of children and recordkeeping
requirements. Interestingly, the Wikipedia site referenced earlier, mentions that the state of
Massachusetts set minimum wages for women and children in 1912 (26 years before the FSLA)
and other states followed suit.
As of July 2009, two years after the last amendment was enacted, the minimum wage is at
$7.25 after being raised 22 separate times. States can and do set their own minimum wage but
workers will get paid the minimum wage that is the higher of the FSLA or the minimum wage set
by the state (Bradley, p. 6). The National Conference of State Legislatures (NCSL) published the
following statistics about the minimum wage in each state on its website4. Eighteen states began
the 2018 New Year by increasing their minimum wages to automatically match the cost of living
(CPI) while eleven others increased their rate due to scheduled legislation. Currently, five states
have no minimum wage law, two have wage lower than the FSLA, 14 states match the FSLA and
29 states have minimum wage that is higher than the FSLA with the highest in D.C. at $13.25.
The FSLA does not cover the following workers: workers with disabilities, certain youth
workers, bona fide executives/administrative/professional employees, seasonal workers, state or
local government workers, farmers, small circulation newspapers, casual domestic service
workers, newspapers delivery workers, and certain employees in computer related occupations.
The FSLA allows payment of wages below the minimum wage to the following groups: youth,
learners, full time students, individuals with disabilities and tipped workers. In 1938, the FSLA
4
http://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx
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represented about 20 percent of the labor force but coverage has been expanded over time and now
covers approximately 130 million workers or 84 percent of the labor force (Bradley).
2.3.
Canada
The initial attempt was through the federal “Fair Wages Policy” in the 1900, which was
modified to become more comprehensive in the 1920 and by that time six provinces have passed
similar laws. Economists have for many years disagreed about their effectiveness, arguing that
they may price low-skilled workers out of the market and cause unemployment. The Canadian
minimum wage legislation was initially intended to prevent the exploitation of workers by firms
after which it was amended to ensure workers received a subsistence wage and eventually evolved
to protect the vulnerable groups (women, young workers and new immigrants) from
discrimination. By the mid-1950s, most Canadian provinces had enacted minimum wage
legislation for male employees. In 1996, the federal minimum wage was eliminated and the
provincial minimum wage was used for the federal employees in those specific provinces. The
Canada Labour Code applies to organizations under federal jurisdiction and it regulated minimum
wage, overtime pay, equal pay, child labour and record keeping (Schwind et al). Comparable to
the US minimum wage laws, the law covered some jobs but not executive, administrative,
professional and other employees. The Canada Labour Code was repealed and replaced by the
Canadian Human Rights Act in 1977.
The federal hourly minimum wage in Canada as reported by the Government of Canada5
was $1.65 in 1965 and steadily increased to $7.5 in 1996. The provinces set their own minimum
5
http://srv116.services.gc.ca/dimt-wid/sm-mw/rpt2.aspx
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wage and as of 2018 it is: Alberta ($15.00), British Columbia ($12.65), Manitoba ($11.35), New
Brunswick ($11.25), Newfoundland and Labrador ($11.15), Northwest Territories ($13.46), Nova
Scotia ($11.00), Nunavut ($13.00), Ontario ($14.00), Prince Edward Island ($11.55), Quebec
($12.00), Saskatchewan ($11.06) and Yukon ($11.51).
Statistics Canada6 published the minimum wage from 1975 to 2014. Taking inflation into
account, the highest real minimum wage was in 1976 at $11 an hour where the average hourly
peaked at $24. Over the same time period, the average minimum wage is $10.39 per hour and the
average hourly wage is between $22.70 and $24.51 per hour depending on the data source. The
ratio of the real minimum wage to the average hourly earnings is always just under 0.5. The
proportion of employees paid at the minimum is lowest in Alberta and highest in Ontario while
the proportion for Canada is just over 7%. The proportion of the groups most likely to get paid
minimum wage did not change much from 1997 to 2014. These groups are youth (15-19 at 49%,
20-24 at 15%), women (9% compared to 6% for men), students (29%) and people with lower level
of education (20% compared with 3% of people with university degree).
3.
Literature Review
3.1.
United States
Bradley published the CRS Report “The Federal Minimum Wage: In Brief” in June 2017
and it was prepared for the members and committees of Congress. The report state that there are
approximately 2.2 million workers (2.7 %) with wages at or below the minimum wage and most
are female, above 20 years of age and work part time in the food industry. The report identified
6
https://www150.statcan.gc.ca/n1/pub/11-630-x/11-630-x2015006-eng.htm
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the characteristics of minimum wage workers by age, gender, work status (full or part time),
occupation and educational attainment. The age percentages are: 16-19 at 20.6 %, 20-24 at 24.8
%, 25-29 at 13.8 % and above 30 at 40.9 %. The gender percentages are: men at 35.7 % and women
at 64.3 %. The work status percentages are: full-time at 41.1 % and part-time at 58.9 %. The
occupation percentages are: service (healthcare, protective, food, building and ground
maintenance, personal care) at 66.5%, sales and office at 16.8 % and all other at 16.7 %. The
educational attainment percentages are: less than high school at 21.3 %, high school at 31.0 %,
some college at 27,.5 %, associate’s degree at 8.9 % and Bachelor’s and higher at 11.4 %.
Elwell summarized the real minimum wage in his report to the members and committees
of Congress. Because of inflation and the fact that the minimum wage is not indexed to the price
level, the real purchasing power is lost. Elwell calculated real minimum wages for every year there
was a minimum wage amendment and used 2013 dollars based on the CPI index (100 in 1984).
The year with the highest real minimum wage, $10.69, was 1968 which had a minimum wage of
$1.6 and a CPI of 34.3. The current minimum wage is $ 7.25 and in order to now have the same
purchasing power as in 1968, the minimum wage has to increase by $3.44 (47%) to $10.69.
The Congressional Budget Office (CBO) authorized a study in 2014 to determine “The
Effects of Minimum-Wage Increase on Employment and Family Income” (Elmendof, D., 2014).
The CBO’s mandate is to provide objective and impartial analysis so the report does not make any
recommendations. The overall result is that most low wage workers would have a higher family
income and some would rise above the poverty threshold; however, some other jobs for low wage
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workers would probably be eliminated. The study considered two options to raise the minimum
wage to either $10.10 or $9.00.
The $10.10 option would see a loss of about 500,000 jobs (0.3 %) but could be larger up
to 1 million. About 16.5 million would have higher earnings and 900,000 would be moved above
the poverty line. There will be change to real income of about $5 billion (bn), $12 bn, $2 bn and
-$17 bn for families with income below, between 1 and 3 times, between 4 and 6 times and above
6 times the poverty threshold respectively. The net change is a $2 bn increase in family income.
The $9.00 option would see a loss of about 100,000 jobs (0.1 %) but could be larger up to
200,000. About 7.6 million would have higher earnings and 300,000 would be moved above the
poverty line. There will be change to real income of about $1 billion (bn), $3 bn, $1 bn and -$4 bn
for families with income below, between 1 and 3 times, between 4 and 6 times and above 6 times
the poverty threshold respectively. The net change is a $1 bn increase in family income.
3.2.
Canada
Brecher and Gross used a simple general-equilibrium model of perfect competition to show
that higher minimum wages may paradoxically lead to greater levels of total employment if the
income redistribution effect outweighs the substitution effects in production and consumption.
They argue that this outcome is possible because of a difference in the factor intensity between
industries and a taste difference between consumers as well as hiking the minimum wage
redistributes income between heterogeneous consumers. Simply put – since low income wage
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earners spend almost all of their income in the economy, this money goes back into the economy
which leads to an increased demand for labour, which leads to more wages being earned.
Brouillette et al found that the consumer price index (CPI) inflation could be boosted by
about 0.1 % on average in 2018 and reduce the gross domestic product (GDP) by roughly 0.1 %
by early 2019 as a consequence of raising the minimum wage. As well, although the net impact on
labor income would be positive, employment would fall by 60,000 which is a number that lies in
the lower part of a range (30,000 - 140,000) obtained from an accounting exercise. Higher inflation
would cause an increase in interest rate which forces consumption to decline and that would more
than offset the higher labour income. A change of 0.1% in an index that varies between 1.5 and
2% will not cause an increase in interest rates as there are many other factors, including politics
that shape interest rate policies for national institutions such as the US Federal Reserve and the
Bank of Canada.
Galarneau and Fecteau’s study in 2014 state that teens account for half of all minimum
wage workers and that one in three teens work for the minimum wage. As well, the study found
that prime-aged (25-54) women, immigrants, and low educated workers constitute a
disproportionate percentage of minimum wage earners. The study looked at industries with
significant numbers of minimum wage employees between 1975 and 2013, and found that the
average hourly earnings are stable and range from $18 to $24 using 2013 dollars. The minimum
wage has steadily increased specifically over the last ten years and hence the ratio of the real
minimum wage to the real average hourly earnings steadily increased from around 40% in 2005 to
45% in 2013 mainly driven by minimum wage amendments.
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Lau wrote the paper “Against the Minimum Wage” and was published by the “Frontier
Centre for Public Policy”. Lau claims that based on the best empirical research and basic economic
theory, the three consequences of raising the minimum wage are: an increase in poverty (or in the
best case no discernible effect on poverty), a decrease in employment especially among young
workers and finally reduced economic growth. Lau mentions a study by a government of Ontario
think tank that supports the first two consequences: poverty and unemployment. Lau quotes Nobel
Laureate Milton Freidman and what he said about minimum wage legislation: “about as clear a
case as one could hope to find of a measure whose effects are precisely the opposite of those
intended by the men of goodwill who support it”. Others are also impacted and those are the
businesses that have to close because they can’t absorb the higher labor costs and the consumers
who now have lost shopping option because of the closure. Lau recommends an immediate freeze
on minimum wages and ideally should be scrapped completely.
Riddell states in his paper, “The Labor Market in Canada, 2000 – 2016”, that Canada is
situated about halfway between the US and Europe when considering the extent of unionization
and the level of the minimum wage relative to the median wage. Riddell credits the resource boom
from the 1990s to 2014 as the reason behind Canada’s economy and labor market performing well.
During the researched period, 2000-2016, the economic downturns were much less pronounced
than earlier periods and milder than in the US and much of Europe. As well, real wage gains were
substantial, income equality has been stable and the male – female earnings gap has continued to
decline. There has been substantial labor reallocation due to job losses and unemployment in
resource rich regions since 2014. The substantial gains in real wages have been unevenly shared
with the lion’s share going to the top of the income distribution.
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Rybczynski and Sen researched in 2017 the effects of the minimum wage by using panel
data from Canadian provinces as evidence. Although recent US studies offer conflicting evidence
on minimum wage impacts, the authors estimate a 10% increase in minimum wage is associated
with 1%-4% reduction in employment rates of both male and female teens and prime-aged
immigrants. The study used data from all Canadian provinces from 1981 to 2011 to research the
effects of 185 amendments to minimum wage on employment rates. The study makes use of crossprovince data and time-series variation with a large number of legislated amendments. The authors
estimated minimum wage effects across age groups, gender and with respect to immigrants. They
state that the Canadian data are appropriate to study the effects on immigrants because the
percentage of recent immigrants (less than 10 years) earning minimum wage has risen sharply
(6.9% in 1998 to 19.1% in 2011) since the late 1990s.
The results from Rybczynski and Sen’s paper were divided into four areas. The first area
contains the baseline estimates for teens and prime-aged adults using data from 1981-2011. The
second area contains the estimates for teens (15-19), older teens (18-19) and for immigrants (other
vulnerable groups) using data from 1990-2011. The third area contains the results of sensitivity
checks and finally the fourth area contains the results of Instrumental Variables (IV).
For the first area that contains the baseline estimates for teens and prime-aged adults using
data from 1981-2011, there was no statistically significant gender difference in the drop of teen
employment; however, the 10% increase in the minimum wage was found to be significantly
correlated with a 1%-4% reduction in employment rates for both genders. Put another way, the
coefficient estimates of the effects of the minimum wage on employment rates were negative and
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statistically significant at either the 1% or 5% levels. The study conducted a robustness check by
employing province and year effects, province specific linear trends and quadratic trends and the
authors arrived at the same results stated earlier. There was small and statistically insignificant
effect of minimum wage on employment of prime-aged adult men and women. Additionally, there
was no evidence of disproportionate employment effects on women although women are more
likely to earn minimum wage than men.
The second area contains the results for teens, older teens and immigrant’s data from 19902011. Older teens will receive at least the adult minimum wage whether they have finished high
school or not. School enrollment will tend to be higher in a high unemployment economy in an
effort of workers to improve or acquire new skills. The authors calculated the coefficient estimates
at the baseline and a second set using the baseline plus the enrollment numbers. They used school
enrolment rate since enrolled students are very likely to work part time jobs which pay at or near
the minimum wage. Area one used data from 1981-2011 and area two used data from 1990-2011.
The results for teens using the data from 1990-2011 were larger (in the negative) and still
statistically significant at the 1% than those teens using data from 1981-2011. This indicates that
more teens are earning minimum wage post 1990. The results for older teens are similar to teens
and are larger for women than for men; however, they are less precise than those for teens. The
authors state that immigrants are overlooked and are becoming an increasingly relevant population
group. For young immigrants aged 16-24, the coefficient estimates are negative but statistically
insignificant. For prime-aged immigrants aged 25-54, the coefficient estimates are negative and
statistically significant except when using a quadratic in provincial linear trend. When using a
quadratic in provincial linear trend, the coefficient estimates are negative but statistically
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insignificant which is expected given the small sample size of immigrants relative to the whole
population. The findings in this area for the prime-aged immigrants contrasts with the findings in
area one for prime-aged adults for the Canadian population as a whole.
In the third area, the authors performed sensitivity checks on teen employment rates only
since the sample data pool is large and the findings are robust (statistically significant at 1%).
To confirm their findings, the authors used leaded and lagged values of the minimum wage. That
is, they used values of the minimum wage from each of the 3 years following and the 3 years
lagging to determine if there is a statistically significant relationship between these values and the
current employment rate. After the inclusion of the leaded values, the coefficient estimates
remained statistically significant. Since it may take at least one year for the full effects of any
minimum wage amendment to manifest, the authors used the lagged values of employment rates
as well. The coefficient estimates of the effects of the minimum wage on lagged employment rates
were substantial, negative and statistically significant. Additionally, the authors used two other
methods to perform a sensitivity check. First, they researched the effect of the size of the change
of the minimum wage on employment rate and found that there is no differential impact on
employment outcomes if the minimum wage increase exceeds 5%. Given that two-thirds of
minimum-wage hikes are within 2.5% of the 5% level, the preceding result was not a surprise.
Second, the authors excluded the recessionary periods and concluded that the coefficient estimate
of the effect of the minimum wage on employment rate is negative, larger in magnitude and more
precise.
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The fourth area of the study contains the results of introducing Instrumental Variables (IV)
to determine the robustness of the earlier findings and deal with the possible simultaneity bias. The
authors state the following about the simultaneity bias:
“If increases in the minimum wage are a policy response to increases in low-wage
unemployment, then least squares estimation will result in coefficient estimates that are biased
and inconsistent. Thus, IV estimation can be a possible strategy to address the concerns.”
The following IVs where introduced: regional average log real minimum wage,
Progressive Conservative Party (PC), Liberal Party (Lib), New Democratic Party (NDP) and three
additional instruments that are the proportion of seats held by the PC, Lib and NDP in each
province and in each year. The authors find that, using the IVs, the coefficient estimates of the
effects of the minimum wage on employment rate are negative, large and statistically significant.
The authors, Rybczynski and Sen, conclude that their results are robust and that an increase
in minimum wage is significantly correlated with unemployment for teens and that they did not
find significant gender differences in minimum wage effects. As well, they found that the effect
on prime-aged immigrants is as large as it is on teens.
Shumakova wrote the paper “The Effect of the Minimum Wage on the Employment Rate
in Canada, 1979 – 2016” as a requirement for an M.A. degree at the Department of Economics of
the University of Ottawa in 2017. Shumakova used the Canadian Labour Force Survey data from
1979-2016 in an econometric model that can account for minimum wage with or without lag. The
paper considers teens (16-19) and young adults (20-24) for both genders together and separately.
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The overall result is that a raise in the minimum wage has a negative and statistically significant
dis-employment of teens with a smaller effect on young adults. Specifically, “a 10% increase in
the minimum wage decreases the teenage employment rate by approximately 1.4%” for teens and
0.7 % for young adults. When the lag was considered in the model, it was found that the effect on
teens takes from 12 to 18 months to manifest and around 6 months for young adults although the
magnitude of the effect is unchanged. The results were separated by gender and the results for
males were slightly larger. The results were found to be robust using different measures.
Stevens. In “The Fight for a $15 Minimum Wage in Saskatchewan”, Stevens paints a
picture of how some organizations (unions, rank-and-file workers, students and community
members) are asking to raise the minimum wage while others (Canadian Federation of Independent
Business (CFIB) and business owners) are asking to reduce it. As well, some researchers support
the increase while others don’t. The CFIB claims that an increase to $15 an hour would result in
the loss of jobs (7,500 to 17,000 youth jobs). This is based on the simple yet unsubstantiated
formula that every 10% increase in the minimum wage will result in at 3% to 6% reduction of
employment of workers aged 15 to 19 (Wong, Queenie, 2017)7. The Financial Accountability
Office (FAO) in Ontario and TD Bank have published their assessment of phasing in the $15 per
hour minimum wage in Ontario. The assessment says the following: “As a tool to fight poverty,
the FOA concludes, the $15 hair hour minimum wage falls short of its intended goal, despite
boosting wages for over 1 million workers.” The increase in minimum wage could result in the
loss of 50,000 jobs which is about 0.7% of total employment as a consequence of the increased
payroll costs. If the 0.7% is applied to Saskatchewan, it means a loss of 3,245 jobs as opposed to
7
http://www.cfib-fcei.ca/cfib-documents/rr3445.pdf
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the 7,500-17,000 jobs lost as claimed by the CFIB. Stevens concludes his paper by stating that
“the $15 campaign needs to be couched in a broader set of anti-poverty initiatives” such as more
progressive set of labor rights reforms (access to collective bargaining, living wages and secure
employment) to address “nearly a quarter of the province’s workplace employed in what are
typically low wage industries and occupations.”
Yusuff (2012) wrote his paper “Effects of Minimum Wage on Youth Employment and
School Enrollment in Canada” as a requirement for an M.A. degree at the Department of
Economics of the University of Lethbridge in 2012. The data used was from the Public Use of
Microdata of Survey of Labour and Income Dynamics over the period 2005-2011. The author
concluded that a 10 % increase in the minimum wage induces about 3.96 % decrease in employment
of low skilled workers especially youth (16-19). As well, it was found that an increase in the minimum
wage has a statistically significant positive correlation with school enrollment.
3.3.
International
Aras analyzed the effect of minimum wage level on labor efficiency in the countries
belonging to the OECD. The study used data of minimum wage and labor productivity from the
years between 1995 and 2011 and the estimations were made by panel data analysis method. It
was found that changes in the minimum wage had statistically significant effects on the labor
productivity. The study concludes that “The increase in minimum wage can raise the social
welfare by increasing the labor productivity, or an increase in labor productivity can lead to an
increase in minimum wage”. This is the problem, so few employees are directly affected by
minimum wage increases so that macro measurements are hard to do.
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Cueto discusses how very poor countries deliberately depress wages to attain higher
competitiveness in the global market. This policy distorts the comparative advantage and induces
lower purchasing power which leads to suboptimal consumption. Additionally, the living
conditions of the working poor is unacceptable and so it is unethical. Some companies increase
the wages but they lose the competitiveness if done unilaterally. The authors found that a global
lower bound for minimum represents a Pareto Improvement by enhancing the markets due to the
expansion in sales caused by the increase in real wages of most workers.
Hara Examined the effects of minimum wages on formal and informal firm-provided
training and worker-initiated training in Japan. It was observed that a 1% increase in the minimum
wage causes a 2.8% decrease in the firm provided formal training for workers affected by
minimum wage increases but there was no statistically significant decrease of informal training.
Increasing the minimum wage did not increase worker-initiated training and therefore the overall
effect was a decrease in skill development for workers affected by minimum wages.
Jales estimated the effects of the minimum wage in a developing country with an economy
comprised of formal and informal workers. Informal workers are those that are not subject to the
national social security scheme and they would not benefit from increases in minimum wage. The
minimum wage causes an increase of approximately 16% on average wages; however, the
minimum wage generates large unemployment effects. The decrease is due to the unemployment
effects, which is about 9% and the movement of workers from the formal to the informal sector
raising it by 39%. Collectively, it reduces by approximately 6% the tax revenue collected by the
government to support the social welfare system.
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Knabe analyzed how minimum wage affects employment, wage inequality, public
expenditure and aggregate income in the low-wage sector in Germany. The government could
achieve better employment and income effects with wage subsidies than with minimum wages
given the same spending on unemployment and welfare benefits. Installing minimum wage would
cost over 800,000 low paid jobs and increase fiscal spending by about EUR 4 billion while
household income rises only by EUR 1.1 billion per year. Complementing the minimum wage
with a wage subsidy, which is known as the “French Approach”, is only suitable for moderate
(EUR 5) statutory minimum wages. Wage subsidy by itself is superior to either implementing a
minimum wage by itself or a minimum wage complemented by a wage subsidy.
Kronenberg investigated the correlation between minimum wage and mental health in the
UK. The paper’s results show that there is no impact of minimum wage on mental health of low
wage earners and this is contrary to earlier research by others. To confirm the findings, the author
conducted several robustness checks and used alternative definitions of treatment and control
groups. To improve mental health, the author recommends that policies “should either consider
the non-wage characteristics of employment or potentially larger wage increases.”
Majchrowska analyzed the impact of minimum wage increase on gender wage gap in
Poland. The authors analyzed the impact for different age and educational groups in the private
sectors excluding those in agriculture. Overall, a significant increase in the minimum wage has a
positive impact on all age and educational groups. Specifically, it significantly decreased the wage
gap among young workers but had negligible impact on the wage gap for middle-aged workers.
The impact on wage gap among education groups where much smaller still. The results are in-line
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with previous studies for both developed and developing countries as well as with the authors
intuition that’s the minimum wage increase mainly affects the workers for whom the minimum
wage is binding: those with low labor market experience and relatively poor qualifications. As
such, minimum wage policy could be used to decrease the gender wage gap; however, potential
dis-employment effects should be considered.
Saari estimated the impact of minimum wages on poverty across ethnic groups in Malaysia.
Unlike other countries whose lower income groups are usually associated with the minority in the
population, in Malaysia, the Malays who constitute the largest ethnic group, receive a lower
income share than the other relatively smaller ethnic groups. In 2005, the Malays per capita
monthly income was 63% and 26% lower than the per capita incomes of Chinese and Indians.
About 2.8 million workers (28%) in Malaysia were paid a monthly basic wage that was below the
poverty line as per data from 2005 and that constitutes a strong reason to introduce minimum wage
legislation. It was found that minimum wages potentially increase wages of the poor people which
reduces poverty for all ethnic groups. The percentage of formal workers in each ethnic group are:
66 % Malays, 74.2 % Chinese, 74.5 % Indian and 56.3 % others (Saari, Table 2). Hence, the Indian
ethnic group would benefit the most since about two-thirds are employed in the formal sector. The
results of this paper are highly relevant for the short run and they may no longer hold for the long
run due to the following factors. First, the interpretation of these results is highly sensitive to the
definition of informal workers (workers that are not subject to the national social security scheme;
46 % formal and 54 % informal). Second, the income effects will vary subject to the compliance
of the employers with the minimum wages. Finally, only the wage effects were considered while
the dis-employment effect was ignored.
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Weng’s article does not research the effect of instituting a minimum wage on the economy
but instead it is about, and appropriately titled, “Re-examining the Urban Civilization Using the
Minimum Wage Level as an Alternative Value-Evaluation Basis”. Countries are trying to increase
the growth level by increasing the per capita income or GDP but these indicators omit the real
value of the human life quality and the environmental / ecological systems. The author proposes
to utilize the minimum wage level as a conversion basis to adjust the mainstream economic
indicator. Weng considers several megacities in east Asia including Tokyo, Osaka, Seoul, Beijing,
Shanghai, Guangzhou, Taipei and Hong Kong. The following ratios were used: Annual per capita
GDP/ Annual per capita minimum wage (indicator I), Annual per capita disposable income/
Annual per capita minimum wage (indicator II) and Annual per capita consumption expenditure/
Annual per capita minimum wage (indicator III) to propose an alternative perspective to reexamine the current mainstream value of civilization.
Considering just the per capita GDP, Tokyo stands at USD $66,136 and it is quite superior
to the other cities in descending order: Hong Kong (40,215), Seoul (33,229) and the lowest is
Shanghai (15,851). In contrast to using just the GDP, the indicators I, II, and III for Tokyo, Osaka,
Seoul and Hong Kong are lower than Beijing, Shanghai, Guangzhou and Taipei. Weng states:
“Per capita disposal income in Tokyo, Osaka and Hong Kong might not satisfy the
subsistence level; with regard to indicator III in those cities, the minimum wage level
representing the subsistence level of income is actually smaller than the individual’s current
consumption expenditure, indicating that consumption desire might be suppressed.”
21
In contrast, Beijing, Shanghai, Guangzhou and Taipei might consume too much
expenditure than the subsistence level. Weng introduces another indicator as the ratio of Annual
per Capita consumption indicator / Annual per capita disposable income (indicator IV) and finds
that there are no significant differences in the value of indicator IV among all cities. Weng used as
well the per capita municipal solid waste (MSW) as an environmental indicator and observed that
Tokyo, Osaka, Taipei and Hong Kong are more environmentally friendly than the other cities
Seoul, Beijing, Shanghai, Guangzhou.
4.
Conclusion
Even though many studies show that a raise in the minimum wage will have a dis-
employment effect, most countries are legislating minimum wage and more and more are
connecting the increase in the minimum wage to the CPI.
In the US, there are approximately 2.2 million workers (2.7 %) with wages at or below the
minimum wage and most are female, above 20 years of age and work part time in the food industry.
the CBO report in 2014 shows that raising the minimum wage to either $9.00 or $10.10 would see
a loss of about 100,000 jobs and 500,000 respectively. The job losses could be as high as double
the figures (200,000 and 1,000,000). Overall, the increase in the minimum wage will move
300,000 - 900,000 people above the poverty line and increase aggregate family income by about
$ 2,000,000,000.
22
In Canada, there was 1.57 million (10 %) individuals earning the minimum wage in the
first quarter of 2018 as per Statistics Canada8. This contrasts with the 953,000 (6 %) in the first
quarter of 2017. This is not surprising as many employees were getting paid more than the previous
minimum wage but less than the new minimum wage so they are now classified as minimum wage
earners. The proportion minimum wage employees under the age of 25 fell from 52 % to 43 % and
those aged 35 to 64 increased from 25 % to 31 %. Raising the minimum wage will have a disemployment effect from 1-6 % (Yusuff at 3.96%, Rybczynski and Sen from1-4%, Shumakova at
1.4%, and Stevens from 3-6 %). Assuming a 4 % dis-employment effect means about 40,000 to
60,000 jobs lost (4 % x 1 to 1.57 million) which is similar to the estimate by Brouillette et al.
The cost incurred by employers will depend on the industry. The small business website9
states that highly automated businesses might have labor costs less than 10 % (as a percentage of
gross income) while retail is higher at about 15-20 %. Restaurants average around 30 % and service
business go as high as 50%. A 10 % raise in the minimum wage will at most increase the labor
cost for a business by 10 % if all its employees earn the minimum wage. Taking a food business
as an example with $ 1 million sales will have $300,000 as labor cost at 30 % and an increase of a
maximum of $ 30,000 in labor cost (10 % of $300,000).
International research has similar findings. Aras found that it (an increase in minimum
wage) raises social welfare and Cueto recommends it to increase purchasing power. Hara found
that the overall effect was a decrease in skill development for workers affected by minimum wages.
Jales found that it moves worker to the informal section and reduces taxes collected. Knabe
8
9
https://www150.statcan.gc.ca/n1/pub/75-006-x/2018001/article/54974-eng.htm
https://smallbusiness.chron.com/much-gross-revenue-should-payroll-18985.html
23
recommends a wage subsidy over minimum wage. Kronenberg’s results show that there is no
impact of minimum wage on mental health of low wage earners and this is contrary to earlier
research by others. Majchrowska showed that it significantly decreased the wage gap among young
workers but had negligible impact on the wage gap for middle-aged workers. Saari recommended
a minimum wage increase to move many of the 2.8 million (28 %) workers above the poverty line.
Weng used the minimum wage as a conversion basis to adjust the mainstream economic indicator.
Table 1 below shows a summary of all the articles reviewed and what each article states
about the effects of raising the minimum wage on the various metrics. A “+” means that the author
found that a raise in the minimum wage positively affects that metric, a “0” (Zero) means neutral
effect and a “-” means it negatively affects that metric.
It seems the majority of the articles confirm that there is a dis-employment effect; however,
a wholistic approach that considers all the other metrics is best. Another point to note is that each
article had limitations on the data and the models they used to estimate the effect. Overall, an
increase in the minimum wage moves people above the poverty line and increases the family
income of those affected. Hiking a minimum wage redistributes income between heterogeneous
consumers (Brecher and Gross) and those minimum wage earners will spend their extra money
which stimulates the economy and increases demand.
24
Aras
Elmendorf, CBO
Knabe
+
Brecher
+
Brouillette
-
Cueto
-
-
Lau
-
Majchrowska
-
Rybczynski, Sen
-
Saari
-
Shumakova
-
Stevens
+
-
HARA
+
0
-
Jales
Kronenberg
0
+
+
Table 1 – Summary of articles’ findings
25
+
Social Welfare
Gender Wage Gap
Economic Growth
Poverty
Mental Health
Training, worker initiated
Training by Firm
Interest Rate
GDP
CPI
Employment
Labor Productivity
Taxes collected
+
In-Formal workers
+
Formal workers
+
+
-
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