The Good Ol’ Days

My two kids are still far too young to be farmed out to earn their keep in the labour market, but when they are (in about a decade), I really hope that the value of minimum wages in Canada improves. 

If not, not only are they going to have to work harder and harder to get by along with millions of others young and old, but I’ll have to bore them with stories about the good ol’ days when minimum wages were worth a lot more.   When I was starting to enter the labour force in the late 1970s, minimum wages in Canada provided a much more decent paycheck than they have since, or than they do today.

I’ve updated some calculations of what the real value of minimum wages are for different provinces across Canada and included them in the September issue of the quarterly Economic Climate for Bargaining publication I produce.    

This shows that, despite recent increases, the real value of the minimum wage in every province of Canada is still less than what it was 33 years ago, with the exception of Newfoundland.  That’s right, folks, the over half a million Canadians who are paid the minimum wage are distinctly worse off now than they would have been a generation ago in 1976.   All those whose wages are also positively influenced by the minimum wage (and that’s a lot of us) are also worse off.

The federal government’s national minimum wage of $2.90 in 1976 would now be worth $10.70 if it had kept up with inflation.  The average minimum wage across Canada from 1976 would now be worth $9.58: higher than any provincial minimum wage is now. 

Thirty three years is a long time ago.  That’s when the Bay City Rollers rose to music superstardom.   I’m not suggesting we should go back to those days.   We’ve made a lot of technological and social progress since then, but it hasn’t trickled down to better wages for most people — and especially for the poorest paid.

The low paid aren’t just youth or part-time workers.   In 2008, there were 1.7 million Canadians who were paid less than $10 an hour.  Almost half (47%) of these were full-time workers and 62% were women.  Over 500,000 of them were adults working full-time.

These aren’t middling amounts either. If B.C.’s minimum wage had kept up with inflation since 1974, someone working full-time full-year would get a wage increase of $4,000 a year: enough to bring an individual living in a mid-sized city just about up to the LICO poverty line.  That’s a lot more than they get from any tax cut.

In many ways the last thirty years of neo-liberal economics has been a lost generation for most working people.  As Statistics Canada showed last year in their report on Earnings and Incomes over the Past Quarter Century, the median earnings of Canadians employed full-time full-year changed very little from 1980 to 2005: earnings rose at the top end, stagnated in the middle and decline for those at the bottom.  

Armine Yalnyzian showed in the CCPA’s The Rich and the Rest of Us  report  not only has there been a dramatic increase in inequality of earnings over the past 25 years, but also everybody but the richest 10%  are working longer hours just to get by.  On top of this, Marc Lee’s study on Eroding Tax Fairness showed that  our tax system is now far more regressive than it was in 1990.  The planned move by Ontario and BC to convert their retail sales taxes to a harmonized sales tax, shifting of billions in taxes from corporations to households, will no doubt make the tax system even more regressive.  

After 30 years of regress on wages and taxes, it would be good to make more progress–for a lot of much more substantial reasons.   But I also really don’t want to get nostalgic for those days!

11 comments

  • Good post.

    Somewhere I have the series I constructed on the evolution of real average wages. Basically there was zero growth in real wages between 76 and around 1998. Actually a shallow U. Part of neoliberalism is manner in which households attempted to augment their purchasing power in terms of consumption was by supplying more paid labour and accessing higher levels of consumer credit. The flip side is that this dynamic, I would argue, was the basis for a populist tax revolt wherein the demand for tax reductions became a promising avenue for maintaining and augmenting private consumption in the face of stagnant and in many cases declining real wages. Perhaps this helps explain Marc”s observation on the increasing regressivity of taxes.

  • I’ve got two comments.

    First, it really irks me when people use LICO as the “poverty line” when they clearly aren’t. LICO measures people who are a certain amount worse off than the average person. Since there will always be people who are below average (unless we’re communist and everyone is exactly equal), there will always be LICOs. It doesn’t necessarily mean people below LICOs live in poverty. Here’s the explanation from StatsCan: “Statistics Canada has clearly and consistently emphasized, since their publication began over 25 years ago, that the LICOs are quite different from measures of poverty. They reflect a consistent and well-defined methodology that identifies those who are substantially worse off than the average.”

    Second, and I know the literature on this is mixed, but if we’re economists shouldn’t we believe that demand for a product, in this case labour, responds to prices? If so, then a minimum wage increase will make it harder for Toby’s kids to find a job. And if the economy is doing well, the minimum wage rate probably shouldn’t matter because it won’t be binding anyways. Before the recession hit, lots of entry-level jobs at grocery stores and KFC were paying in excess of $10/hour, at least in Vancouver and Victoria.

  • thanks Toby for pulling these issues together, along with the links.

    in our area it’s the adults who are seeking jobs at Timmy’s and delivering papers, ’cause they’re the only job options around. then you get ageism and lookism issues kicking in, along with other issues. i ‘joked’ the other day with the farmer i mentioned earlier that we’d be needing to sit down as a community and decide who was worse off and let them get the available Mcjobs instead of everyone competing. people try to support eachother in anycase but communities have reached their limits. things have to change in a serious way.

    travis, you’re right on with the reason for people ranting about taxes. it seems to residents to be the only available option to make their lives better. this focus is due in no small part to the fact that politicians and media make taxes an issue, whereas we don’t get Harper and Flaherty saying, ‘we’ll increase [minimum] wages, we’ll index wages to inflation’ as campaign promises.

    funny how that is. selective economics. they ignore the side of the equation that would be of most benefit to residents and the real economy.

  • Nice article, good read, broached the subject of inflation or even stagflation

  • Question: Woudnt raising Canadas interest rate to make the inflation rate fall in tandem for the minimum wage increases we already have be slightly better, if we use commentators David’s analysis that labor is a product and is affected by prices, making it harder for Canadians to find work

    Im no expert so I dont know the specifics but would such a move in our interest rate however minor cripple our economy, if it was limited to making the best bang for our buck out the minimum wages we have by allowing inflation to fall in line with wages

  • Thanks for the comments:

    David: Obviously there are different conceptions of poverty, and many of the factors that affect this are not related to money income. Better public services, for instance, certainly reduce the amount of money income that is needed. It is true that Statistics Canada includes that caveat about LICOs: I remember when they put it up there and know about some of the sources of pressure that pushed them to do so. However, the OECD has no hesitation about equating its low income line (which is similar to Statistics Canada’s Low Income Measure or LIM) with poverty. See their recent Growing Unequal report:
    http://www.oecd.org/document/53/0,3343,en_2649_33933_41460917_1_1_1_1,00.html.

    This LIM measure (calculated as less than half of the median income) is more relative than the LICO. LICOs are calculated as the average income level at which a family spends more than 63% of their after tax income on food, shelter and clothing. That is not just a relative measure, as you suggest. So it is not true to say we will always have people classified as low income using this measure.

    It is interesting to see that HRSDC’s Market Basket Measure of low income, which is not relative at all, but based on the absolute cost of buying a specific basket of goods and services, results in a higher incidence of low income than the LICOs do.
    http://www.hrsdc.gc.ca/eng/publications_resources/research/categories/inclusion/2009/sp-909-07-09/sp_909_07_09e.pdf

    So the LICO’s are likely to understate the incidence of low income (aka poverty) if we use a completely absolute measure instead. I and others use the LICOs, which tend to be lower, because they are more available. Perhaps you wouldn’t, but I think that any one individual working full-time and earning less than $20,000 a year in Canada probably very likely lives in a degree of poverty.

    One the issue of higher minimum wages and the impact on employment, we may both be economists but that doesn’t mean we think alike. I certainly didn’t believe everything they taught in Eco 101 about perfect markets. I think the evidence that markets don’t often behave in this way is all around us, and should also be evident there on a grand scale over the past year. But irrespective of what we may believe, much of the recent evidence is that increasing the minimum wage has little or no impact on employment and in some cases is associated with job growth, as Card and Krueger found in the mid 1990s. Recent experience in the UK with their introduction and raising of the min wage also found little or no impact on employment levels:
    http://www.esrcsocietytoday.ac.uk/ESRCInfoCentre/Plain_English_Summaries/econ_performance_and_development/economic_growth/index175.aspx

    See also CCPA report with some review of the literature:
    http://policyalternatives.ca/documents/National_Office_Pubs/2007/minimum_wage_above_poverty_line.pdf

    Brandon: hiking interest rates can reduce inflation by clobbering the economy and forcing down wages and economic production. We did this before. But now even without hiking interest rates, our economy is already clobbered and we have had slow wage growth for a long time, as Travis also pointed out. Hiking interest rates wouldn’t help: in fact they would help to boost inflation by increasing the cost of mortgage interest payments in the CPI. A better, and often ignored, way to contain inflation is by increasing productivity.

  • Toby: Thanks for your lengthy reply. I found the info you provided on poverty measures quite interesting. I suppose if you are going to try to measure poverty, LICOs might be better than nothing. Although I think a lot of students such as myself probably fall below the LICO and it’s strange to think we’re impovershed. It probably depends a lot on region, since in high-rent cities the necessities will cost a lot, so having 37% of your income left over for other stuff could be a decent chunk of change. Whereas in places where rents are really low, spending 63% of your income on necessities probably means you don’t have a lot of money.

    I was wondering if you were going to bring up Card and Krueger. It’s the one they brought up in our undergrad labour econ class, but there is lots of criticism surrounding the methodology. That being said, I realize there are other studies that have found little or no effects of minimum wage increases (although there are other studies to the contrary).

    The question I’m curious about is, if we assume that the empirical studies showing min. wage increases don’t have much effect, what is the economic explanation? Is it that equilibrium wages are high enough to start with that min. wage increases don’t affect the wage floor? Is it that demand for unskilled labour is very elastic? Is cheap labour a Giffen good so we actually want it more when price goes up? Is there something along the lines of an efficiency wage theory that when workers get paid more, their productivity increases and thus firms don’t have to change their habits? Is it that the studies don’t have a long enough time horizon and that firing workers and/or putting more emphasis on capital is too costly for firms to bother? Do we have uncompetitive labour markets and minimum wages simply move some of the rents from employers to employees, but not enough that the employers would back out of hiring people?

    Does anyone have ideas on why minimum wages might not make much difference in terms of labour demand?

  • Assume that min wage employers can’t substitute capital for labour or already have with a given level of technology such that over the short to medium term min wage employers have an absolute level of demand for unskilled workers. That leaves min wage employers with two options: 1) is to eat the min wage increase in terms of their margins and 2) is to increase their prices.

    It is probably the case that demand for min wage outputs are relatively inelastic. The change in the price of coffee from .95 to 1.20 is probably not going to change the demand for a cup of coffee very much (maybe Starbucks is living proof of the existence of giffen goods). Since all min wage employers face the same increase in labour cost there wont be specific competitive advantages as there would be if just one min wage establishment were to be unionised.

    Part of the problem is that the standard neoclassical model assumes infinite substitutability between capital and labour, perfect price elasticity and price taking behaviour by firms. Locked in this box minimum wage increases should always lead to higher unemployment among the unskilled. Relax a couple of assumptions and then you can get a more ambiguous real world result.

    Dont hate the ambiguity hate the game. See Dave chapelle’ Players Haters Ball

  • Complexity is annoying.
    I have seen many essays about changes in prosperity between thirtyish years ago and now, and many other essays on the ways that the statistics kept, particularly nowadays but to some extent going quite a ways back in time, are misleading, and how different ways of stating change over time can be misleading.
    So for instance, discussions of average income can be misleading if there are a small number of very high earners skewing the average. And if inflation has been understated for years due to changes in the way it’s measured, then an estimate of stagnating median income would change to declining median income. Talking about median household incomes can be misleading if the average hours of work the household needs to make that income has been increasing. If social programs substituting for income have been declining, or user fees increasing, that too does not appear in descriptions of stagnating wages. And on and on.

    I would dearly like someday to see someone pull all the major issues in mismeasurement and inobvious changes together and give me a picture of change in incomes over time that takes all that stuff into account. I suspect that if you looked at median yearly wage for a single full-time income earner, calculated based on old style inflation measures, took into account the erosive effects of changing taxation, loss of social programs, rising user fees and so on and so forth, you would find that median wage has actually declined considerably. But it would be a royal pain to do because things are so complicated.

    Question about wages as a function of supply and demand: If you assume that technological change will continue to increase productivity indefinitely, but that demand for goods has some sort of limits, would that not result eventually in practically no demand for labour, minimal employment and near-zero wages? The more productive labour becomes, the lower the demand for its services and the less it can afford to buy the plenty it produces. The only way out of this that I can see is to reject the market economy as it applies to labour.

  • “I was wondering if you were going to bring up Card and Krueger. It’s the one they brought up in our undergrad labour econ class, but there is lots of criticism surrounding the methodology. That being said, I realize there are other studies that have found little or no effects of minimum wage increases (although there are other studies to the contrary).”

    Card and Kruger used a telephone survey to obtain their data. Neumark and Wascher went back to analyze the payroll data and found an oppsite conclusion. What they discovered was a decrease of employment of 4.6%. Baker, Benjamin, Shuchita 1999 found for every 10% increase in the minimum wage there was a 2.5% decrease in employment. Aaronson and French 2007 found 2-4% decrease in employment for every 10% increase in the minimum wage. Campolieti, Gunderson, Riddell 2006 found simular results to the two previous studies. It seems for every study that confirms increasing the minimum wage won’t have any or little negative effects, there is another study that contradicts it.

    I’m not aruging against raising the minimum wage. I think increasing incomes for low income people is a good policy. I just think it might be more effective if we target income transfers through the tax system to low income people. Basically a negative income tax system, or something similar.

  • Might I add that the following studies: (Baker, Benjamin, Shuchita 1999, Aaronson and French 2007, Campolieti, Gunderson, Riddell 2006) were all separate studies looking a different data from different time periods not from the Card and Kruger study. Just to clear up confusion.

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