Media get it wrong on Bank of Canada minimum wage study

Over a million workers in Ontario just got a big raise thanks to tireless, bottom-up orgainizing, but if you look to the media it’s a bad news story. The same, tired headlines are back. Yesterday, the CBC ran a story titled, “Minimum wage hikes could cost Canada’s economy 60,000 jobs by 2019”. Today, the Toronto Star’s front page blared, “Wage hike could cost 60,000 jobs, Bank of Canada says”.

Reading either of these headlines or the stories that follow, you could be forgiven for not knowing that the cited Bank of Canada research note had a positive conclusion about the effect of minimum wage increases on workers. A major claim of the Bank’s note is that, for workers, the benefits of increasing the minimum wage outweigh the costs in terms of labour income. First of all, the Bank is not predicting 60,000 pink slips but merely a slowdown in continued job growth. The 60,000 figure is a national, annual one and represents just 0.3% of total employment. Monthly job growth has at times exceeded this number.

More importantly, the Bank found that the costs of projected (remember these are still only projections) lower employment are outweighed by the benefits from higher economy-wide wage income stemming directly from the minimum wage increase. The authors write, “On net, however, real labour income should be higher following the implementation of these measures relative to otherwise. This is because the 0.7 per cent increase in the level of aggregate real wages more than offsets the 0.3 per cent decrease in total hours worked.”

(The claim is only moderated by some further assumptions. The Bank’s model predicts economy-wide consumption decreasing due to higher interest rates,  a knock-on effect of higher inflation caused by minimum wage hikes. I personally am skeptical that interest rates would rise automatically due to a tiny 0.1% increase in inflation, especially one coming after years of largely below-target inflation.)

This analysis would have had a very different reception if these stories had an alternate headline like “Bank of Canada finds raising the minimum wage will benefit workers.”

This is not the first time the media have gotten worked up about the wrong numbers. As I pointed out at the time, reporting on an analysis issued in September by the Ontario Financial Accountability Office received similarly skewed coverage, ignoring the finding of net benefits and zeroing in on projected job losses. This isn’t a single case, but a recurring pattern of business-friendly bias.

And beyond the overall positive conclusion, there are several reasons to look critically at the Bank of Canada research note.

First, the note uses a structural general equilibrium model, a class of models that has come under increased scrutiny since the financial crisis because of their over-reliance on rather unrealistic assumptions and the sensitivity of their conclusions to changes in assumptions. For example, new research from Marshall Steinbaum at the Roosevelt Institute suggests labour markets may have a higher degree of what economists call monopsony than previously thought, something that runs counter to standard assumptions about how job markets work. Whereas monopoly is a situation where sellers are few and have disproportionate market power (in the extreme case, one seller with the power to set prices), monopsony is the flip side: a situation where a market has a few large buyers who have disproportionate power. In a labour market, this means businesses can set wages below where they “should” be and can make up for poor performance by having low wages rather than cutting into profits. Steinbaum’s finding challenges standard assumptions about competitive labour markets and the simplistic Economics 101 story about higher wages costing jobs—a story that features heavily in media reporting on the minimum wage.

Second, the Bank of Canada note also relies heavily on older models, so called “two-way fixed-effects”, for their estimates of how aggregate employment reacts to changes in the minimum wage (economists call this an elasticity). These models have been shown to downwardly bias estimates of the relationship, suggesting greater job loss. Once the same and newer data that have been subjected to more advanced statistical methods that are better able to isolate the impacts of the minimum wage from everything else happening in the economy at the same time, they have generally shown negligible to statistically insignificant job and hours reductions. I’ve recounted this newer literature in previous posts. In a similar vein, the Bank makes references to known academic critics of raising the minimum wage, like Morley Gunderson and David Neumark; well-known academic economists who have used updated statistical methods to paint a more sympathetic picture, such as Arin Dube or Michael Reich or UBC’s David Green don’t figure at all.

Coverage like this from the CBC or the Star (nevermind venues like the National Post or the Toronto Sun) begs the question about why don’t we hear about the negative impacts on jobs and growth of things like commercial rent increases or rising CEO salaries. For instance, the salaries of Canada’s top 100 CEOs rose by a whopping 8 percent last year! When the redistribution happens from workers to the top or from one sector of the business world to another (as in the case of commercial rents), things are as they should be. It is only when even a modest amount of redistribution flows in the other direction, as with much-needed minimum wage increases, that we hear tales of imminent mass unemployment or economic collapse.

Luckily, not everyone in the business world has lost their sense of perspective or critical faculties. To their credit, in the same piece warning about mass job loss due to rising minimum wages, the CBC asked Brett House, deputy chief economist at Scotiabank, for his opinion. He’s absolutely right:

The ongoing debate over minimum wages is so important because it speaks to issues of income inequality, House said.

Because over the past decade and a half, he said, any Canadians who own stocks or real estate have done very well, financially speaking. “The recovery has mainly benefited you,” he said. But that’s not true of a huge percentage of the population who depend on their pay cheques as a sole source of income. “If you rely on wages only, you haven’t had a real wage increase in any substantial way in 10 to 15 years.”

That’s why House is among those who thinks the positives of wage increases will outweigh the negatives.