Does Canada need a higher minimum wage? That’s a Nobel question

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“An Indian born economist once explained his personal theory of reincarnation to his graduate economics class,” Paul Krugman wrote in the opening paragraph of his 1994 book, Peddling Prosperity. “‘If you are a good economist, a virtuous economist,’ he said, ‘you are reborn as a physicist. But if you are an evil, wicked economist, you are reborn as a sociologist.’”

The moral of this story is not that physicists are good and sociologists are wicked. It is that, if we imagine the cosmic reward for virtue in this life lies in the next, then the virtuous should expect to be rewarded by coming back as practitioners of an easy science – such as physics. And the not-good should expect to spend their next lifetime labouring in the hardest science of all, namely sociology.

Why is physics an “easy” science? Because it’s possible to do controlled experiments, where you can isolate a single variable and reduce everything to mathematical formula. Why is sociology harder? Because it involves the psychology of human beings, each infinitely more complex than an atom, and that complexity is multiplied across millions of people and billions of interactions.

And economics, to the great frustration of many economists, is a lot closer to sociology than physics.

That means there are few opportunities for controlled experiments. There’s no lab. But the diligent economist may sometimes be able to find natural experiments – which may upset the formulas of the physicist-economists.

One of those economists who went looking for natural experiments is David Card. Last week, the Berkeley professor, a native of Guelph, Ont., and graduate of Queen’s, was awarded the Nobel Prize in economics, “for his empirical contributions to labour economics.”

His early work, for which he is probably still best known, has to do with minimum wages. In the 1990s, he and the late Alan Krueger decided to figure out if the textbook take on the effect of minimum wage laws was correct.

At the time, the standard economics story went something like this: To the extent that they raise workers’ wages, minimum wage rules lead employers to hire fewer workers. As such, a government that raises minimum wages is to some extent causing unemployment.

Prof. Card looked about for a natural experiment to test this theory. He found one in the fast-food restaurants of New Jersey and neighbouring Pennsylvania. In 1992, the first state raised its minimum wage from US$4.25 to US$5.05, while the second state kept it at US$4.25. The fast-food industry is mostly staffed by low-wage workers, so if any sector would see a negative effect from the higher base wage, this would be it.

Yet a loss of jobs in New Jersey’s burger joints is not what the data showed.

Other economists questioned the findings; Professors Card and Krueger revisited the study with more data and in 2000 reached the same conclusion: “The increase in New Jersey’s minimum wage probably had no effect on total employment in New Jersey’s fast-food industry, and possibly had a small positive effect.”

Over the past couple of decades, scores of other studies have found a similar effect, or rather a lack of negative effect, from an increased minimum wage. Economists are still arguing over what’s going on, and why. But in light of the evidence, most are now of the view that raising the minimum wage, so long as it is not done too hastily or raised to too high a level, is likely to be a net benefit to low-wage workers. As such, the minimum wage is a tool that, if used prudently, may be able to reduce poverty and inequality, with benefits greater than its costs.

Which brings us to the application of all of this learning.

On Oct. 1, Ontario’s Doug Ford government upped its minimum wage by a measly 10 cents an hour, to $14.35. Over the past 45 months, the province’s minimum wage has risen by just 2.5 per cent. That’s a significant pullback from the previous Liberal government’s plans; it had rapidly raised the minimum wage from $11.60 in 2017 to $14 in 2018.

Both approaches were motivated by politics, and neither hits the mark. But there’s reason to think that a somewhat higher minimum wage, with annual and automatic increases in line with overall average wage growth across the economy, would be the best way to go.

Economists pro and con: Gather your evidence, and make your case.

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