A lesson on wages for Ford
How do employers in a low-wage labour market respond to an increase in the minimum wage?
For eons conventional economic modelling argued that an increase in wages leads to a decrease in employment – a handy reference point for a business lobby that prefers to keep a firm heel on workers’ wages.
Well, guess what? Textbook economic theory is wrong. In awarding Canadian economist David Card the Nobel Prize in economics, the Royal Swedish Academy of Sciences has given a huge boost to the value of empirical study in the field of labour economics. For it was Card, working alongside American economist Alan Krueger, who put real world wage increases in New Jersey under the microscope and found no support for the theory that a rise in the minimum wage reduced employment.
In the wake of Ontario’s paltry 10-cent-an-hour raise to the minimum wage, Premier Doug Ford should take note. Better yet, he should read up on Card’s findings. Card’s research dates back to 1992. The timing is significant. A legislated state-wide increase to $5.05 an hour from $4.25 – 80 cents! — was passed in 1990, scheduled to go into effect in April, 1992. Many readers will likely recall the recession that hit in the interim and will not be surprised to learn of the vigorous political lobbying by business leaders to put the brakes on the increase.
Instead, the rise was mandated and in surveying more than 400 fast-food restaurants in New Jersey before and after the increase Card and Krueger found no negative employment impact.
The fast-food joints under study included KFC, Wendy’s and Burger King – chosen because fast-food outlets are leading employers of lowwage workers, because the workers form a broadly homogenous group in terms of job requirements, and because the absence of tips in these environments simplified the analysis.
Fast-food outlets in neighbouring eastern Pennsylvania served as the control group. Despite the increase in New Jersey wages, the economists found, full time equivalent employment actually increased in that state relative to Pennsylvania. The analysis continued until eight months after the wage bump.
It’s refreshing to hear support for conventionally left-leaning labour arguments rise from the arena of what we commonly think of as a right-wing science. Economics, that is. Having the Nobel Academy add its gold stamp is a nice touch.
Yet here we are in Ontario with an all-but-stalled approach to the minimum wage, which sits at $14.35 an hour as of this month. Not since the days of Kathleen Wynne’s Liberal government have we seen a serious effort to make the base wage a living wage. Under Wynne, workers would have seen an increase to $15 three years ago.
Star columnist Armine Yalnizyan recently argued in favour of determining a “conceptual anchor” for the minimum wage. Following the European model of setting the minimum wage as a percentage of the average wage, workers in Ontario today would earn a base wage of $15.70 an hour if the minimum wage were set at 60 per cent of the average.
As Yalnizyan points out, in 2020, when essential but lowpaid workers were championed as heroes in the pandemic, the minimum wage in Ontario was 49 per cent of average wages.
One more point on labour economics: In commending David Card for challenging conventional wisdom and advancing fresh thinking, the Nobel Academy also noted his work on the impact on the labour market as a result of immigration. Card analyzed the effects of the 125,000 Cubans who emigrated to the U.S. in 1980. The result? Wages did not fall in Miami, nor did unemployment increase relative to other cities.
The Academy emphasized that Card has established a new framework for these core societal questions. The challenge now is to convince the political powers that they are decades out of date with their old-school economic thinking.
Nobel-winning economist David Card put real world wage increases in New Jersey under the microscope and found no support for the theory that a rise in the minimum wage reduced employment. Premier Doug Ford should take note