This note reviews the channels through which minimum wage increases can affect Canadian economic activity and inflation and assesses the macroeconomic impacts of the scheduled provincial minimum wage increases in the coming years.
The key results are as follows:
• The macroeconomic impacts of these measures may be significant because about 8 per cent of employees in Canada work at the minimum wage, and estimates in the literature suggest that changes in the statutory rate have historically affected the wages of up to 15 per cent of employees with lowest wages.
• The direct pass-through from a simple reduced-form approach suggests that minimum wages could modestly boost consumer price index (CPI) inflation in 2017, ranging from 0.0 to 0.1 percentage point (pp) and by about 0.1 pp on average in 2018, ranging from 0.0 pp to 0.2 pp. The impact for CPI inflation in 2019 is also likely to be modest, ranging from 0.0 to 0.1 pp.
• Simulations using a structural general equilibrium model suggest that the scheduled increases would reduce the level of real gross domestic product (GDP) by roughly 0.1 per cent by early 2019, while boosting CPI inflation by about 0.1 pp. This reflects the following main effects:
o The increases in the minimum wage lead to higher real wages,which push up firms’ marginal costs, and thus inflation increases accordingly as a fraction of firms adjust their prices in the short term.
o Weaker labour demand leads to reduced employment and lower hours worked, although the net impact on labour income is positive. Employment losses amount to about 60,000 workers (hours worked decline by 0.3 per cent), a number that lies in the lower part of the range obtained from a simple accounting exercise (30,000 to 140,000).
o Consumption would be reduced slightly as thehigher inflation would elicit a slight interest rate increase, which would more than offset the higher labour income.
• Potential output should remain unchanged in the short run. Longer-term effects are possible through automation, productivity changes or changes in labour force participation. The sign of these longer-term effects is, however, ambiguous.
Chosen excerpts by Job Market Monitor. Read the whole story at The Impacts of Minimum Wage Increases on the Canadian Economy – Bank of Canada