Another week, another business lobby report that exaggerates the potential negative impact of Ontario’s plan to increase the minimum wage to $15 by 2019.
Actually, we’ve seen this one before: the business lobby group that bills itself as the Keep Ontario Working coalition has re-released a report by the Canadian Centre for Economic Analysis (CANCEA) that it funded and that first came out in August.
Economists from across the country were highly critical of that initial report’s numbers in August, in part because the authors of that report didn’t show all of their work.
That report has now grown into a 200+ page mash up of colourful diagrams, charts, and equations. The report drowns us in detail to recycle overblown claims, but its conclusions remain essentially unchanged and are still fundamentally flawed.
A large portion of this voluminous tome is detailed modelling of the distribution of costs that are the product of a few key, initial assumptions. Indeed, it turns out that one exaggerated assumption about jobs (see below) is driving the main results of this report.
In economics, a model is only as good as its assumptions. In this case, key assumptions are flawed and therefore this model dramatically overstates the potential consequences of a $15 minimum wage and labour law improvements.
There is a lot of fear mongering about the minimum wage in Ontario right now and it’s important that anyone who wants to estimate the potential impact of higher wages and better worker protection laws get it right.
This blog post shows why this latest estimate gets it wrong.
Inflated job loss numbers
The report’s prediction of a disemployment impact of 185,000 jobs “at risk” over two years due to planned changes to Ontario labour laws (Bill 148) that includes raising the minimum wage to $15 by 2019 is bound to once again steal the headlines.
First, let’s get one thing straight: even the report’s authors make clear that they expect job growth in Ontario to continue despite their inflated claims.
They are not predicting that 185,000 pink slips will be delivered to Ontario workers. Instead, they say that job growth in Ontario may be slower than we would have otherwise. Economists call this disemployment—not job loss.
But why is that 185,000 estimate exaggerated? It is based on older economic research that is increasingly out of line with a burgeoning academic consensus around a negligible-to-small impact on employment that may result from moderate minimum wage increases.
Wonkish: why getting elasticities right is important
In the jargon of economics, this is an argument about elasticities of employment to the minimum wage. Elasticity, in this case, is technical shorthand for expressing the percentage change in employment when there is a 10 per cent increase in the minimum wage. So an elasticity of -0.05 means that a 10 per cent increase in the minimum wage generates a 0.5 per cent reduction in employment.
The CANCEA analysis frequently cites elasticities of employment in the range of -0.2 to -0.6 (a 10 per cent increase in the minimum wage leads to a 2 to 6 per cent reduction in employment). These numbers reflect a view that is outdated and has been drastically revised downwards since new, more sophisticated economic models and methods have become common.
The consensus is that, if at all, these types of estimates apply only to teenagers. It is really important to note that in Ontario, 82 per cent of workers who earn less than $15 today are working adults over the age of 20.
Much of today’s best research consistently shows elasticities that are statistically indistinguishable from zero for adults. This translates into, on average, little to no expected job loss on the aggregate.
A helpful table posted on Twitter by economist Trevor Tombe from the University of Calgary shows that using numbers from this most recent Canadian and U.S. research would produce estimates between four and 20 times smaller than CANCEA’s overblown number.
So take these latest numbers with a mountain of salt.
Overestimating equal pay impact
The authors estimate the impact of equal pay provisions within the amendments to Ontario’s Labour Relations Act in Bill 148. It appears that the report assumes that Bill 148 will close the wage gap between part-time workers and full-time workers. However, given the limitations of the equal pay language in the Bill, it seems highly unlikely that all part-time workers will be protected in this way. As a result, this would overestimate the costs and benefits of the equal pay provisions.
Overestimating union density increase
The report assumes that the bill will result in a two per cent increase in union density and that wages in newly unionized workplaces will rise to the average unionized hourly rates.
Currently in Ontario, higher-wage industries have higher union density rates while lower-wage industries do not. As a result, these cost estimates are likely overstated.
Inflated total cost numbers
The report sheds further light on how its authors arrived at their August estimate that the combined effect of a $15 minimum wage and labour law changes in Bill 148 scheduled to be passed this fall will increase labour costs in Ontario by $23 billion.
It’s important to note that this is an estimate of the cost to employers over a two-year period, rather than the annual incremental increase in labour costs.
Even if we accepted the flawed assumptions (which we do not) that yielded such an overblown estimate, the annual incremental cost would actually be $10.2 billion in the first year and $2.4 billion in the second year.
Cherry picking research
The authors state that an assessment of the impact of Ontario’s minimum wage increase should only consider research that specifically looks at Ontario and Canada. There are two main reasons to look more broadly.
First, the Ontario labour market is not that radically different from other labour markets, especially in the U.S. and Canada. Second, comparing more regions is precisely what allowed economists to isolate the true impacts of minimum wage increases on employment from the economic noise and everything that makes a region unique.
The CANCEA report ultimately relies on two studies for the source of its elasticity estimates: a discredited report from the Fraser Institute and another that looked primarily at older Canadian studies (at odds with more recent and more sophisticated research from both the U.S. and Canada). This leads CANCEA to misapply a relatively substantial elasticity to the entire workforce, made even more dramatic by an arbitrary assumption about disemployment from the equal pay provisions in Bill 148.
The authors also only produce their key results using this chosen elasticity. There are no robustness tests that would show employment results using a range of elasticities whether negative, insignificant or positive.
The report further assumes an “expected” scenario where businesses try to avoid absorbing 80 per cent of the cost. It is quite extreme to assume that only 20 per cent of a supply shock will impact businesses.
As CANCEA itself says when talking about other economic shocks, “it is apparent that industries in the province are able to, and have been seen to, respond quickly to external factors far greater than the scale of the Act.” Given a more realistic appraisal of its cost, we should have more faith in the entrepreneurial spirit of Ontario’s businesses to deal with planned improvements to the minimum wage and employment standards.
Shifting the debate
We shouldn’t just get drawn into a dour debate focused on the potential negatives. Remember that the main impact of an increase in the minimum wage is a transfer of money into the pockets of low-wage workers.
One major way this shift can happen without the sky-is-falling costs predicted by the business lobby is through a shift by businesses from a low-wage, high-turnover economy to an economy that flourishes due to higher-wage, lower-turnover, more productive workers and better jobs.
Many economists think this partially explains the small-to-negligible job impacts of moderate minimum wage increases found in so much recent literature. The CANCEA report pays little more than lip service to this fact, assuming very modest cost-savings to business from lower turnover.
Higher productivity and, yes, some transfer of income from richer households and the business sector can help reduce income inequality in Ontario.
A very recent paper by Arin Dube, one of the foremost U.S. minimum wage researchers, clearly shows raising the minimum wage leads to significant poverty reduction: a two to five per cent decrease in the number of non-seniors living in poverty for every 10 per cent increase in the minimum wage, as well as increases in household incomes for the bottom half of households, largest among those in the bottom quarter.
Dube takes 12 of the most credible recent papers on the topic, even including two from the best-known academic opponent of raising the minimum wage, David Neumark, and shows that nearly all of them show consistent, sizeable poverty reduction stemming from increasing the minimum wage. (For a good, non-technical explanation, see this piece in the Washington Post.)
“Too fast, too soon” or long overdue?
Using this report, the Chamber of Commerce and the Keep Ontario Working coalition claim that Ontario’s minimum wage increase is too fast, too soon.
Ontario’s boost of the minimum wage to $15 is not an unprecedented step. There was a similar percentage increase to the minimum wage in B.C. in 2011 over the course of a year. The Fraser Institute, whose research is frequently cited by CANCEA, predicted massive job losses then, too. It turned out they were wrong by a factor of ten: massive job losses did not materialize and the economy easily absorbed the minimum wage increase.
Today, Alberta is currently raising its minimum wage from a lower starting point than Ontario to $15 on a schedule only somewhat longer than Ontario’s. Many U.S. cities and states are doing or planning the same.
Even the U.S. chain store Target has announced that it will raise the minimum it pays its workers to $15 per hour by 2020—a 50 per cent increase over three years, which is bigger and faster than Ontario.
Low-wage workers in Ontario have waited long enough. While the top half of Ontario families have seen gains, the bottom half have fallen behind. These Ontarians need a raise and Bill 148 will deliver one to those who need it most.
Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ (CCPA) Ontario office. Michal Rozworski is a CCPA research associate.
For more information or to arrange interviews with the authors of this piece, please contact: Katie Raso, (613) 563-1341 x321, [email protected].