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Archived - Minimum Wages in canada : theory, evidence and policy

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British Studies

British studies of the effect of minimum wages are effectively divided into two periods. Prior to 1993, minimum wages were set at the industry level by Wage Councils. A limited number of studies evaluated their effects and found no negative effect on employment and occasionally a positive effect, albeit not statistically significant (Machin and Manning 1994, Dickens, Machin and Manning 1999). Even though this evidence is consistent with that found by Card and Kruger in the U.S., Card and Kruger (1995, p. 271) raise the concern that this lack of effect may reflect the possibility that “Wage Councils might have set rates strategically, raising them in industries that were expected to grow, and lowering them in industries that were expected to shrink.”

In 1999, Britain adopted its first-ever national minimum wage. The Low Pay Commission (2000) reported that its background studies did not find negative effects. However, these were essentially case studies or surveys indicating perceptions of the effect at the time the law was passed. More rigorous econometric evaluations, however, generally (but not always) come to a similar conclusion. More specifically:

Overall, there does not appear to be an adverse employment effect economy-wide (Stewart 2004).
There was a conventional adverse employment effect, however, in the low-wage sector where minimum wages would be expected to have an impact. The elasticity of employment with respect to the minimum wage increase ranged from about -0.01 to -0.03 in the low-wage nursing home care sector, indicating that a 10% increase in the minimum wage would reduce employment by about 1% to 3%. This is exactly the “consensus” range of estimates based on earlier US studies.
There is no evidence of spillover effects on wages near the minimum nor of any impact on wage inequality (Dickens and Manning 2004)
There is no evidence of a negative impact on training; if anything, the effects are positive (Arulampalam, Booth and Bryan 2004).

Overall, the British evidence suggests that their recent national minimum wage did not have negative effects except in the low-wage sector. There are three qualifications, however, that should be kept in mind from the recent British experience:

The case studies and surveys are based on perceptions at the time of the policy.

The econometric studies, while solid, were done shortly after the minimum wage came into effect so that longer-run effects are not observed.

The policy was anticipated and some adjustments may have occurred prior, making the before-and-after comparisons appear small.

The minimum wage increases were very small and were based on “what we believed the economy and business could manage” (Low Pay Commission, 2000, p. vii). In other words the wage increases were instituted at a time when they could more easily be absorbed.

Some International Evidence

While the vast majority of studies of the impact of minimum wages have been for the U.S., some international evidence is available. The OECD (1998) conducted pooled time-series, cross-country regressions for nine OECD countries over the period 1975 to 1996 and concluded P. 46):

The results suggest that minimum-wage rises have a negative impact on teenage employment although the magnitude of the reported elasticities varies significantly, from -0.3 to -0.6 when Spain and Portugal are excluded, and from 0 to -0.2 when they are included in the regression. In some of the specifications, negative employment effects are also found for groups of workers other than teenagers.

They did the analysis with and without including Spain and Portugal because of data limitations for those countries. The estimates of the adverse employment effect of -0.3 to -0.6 are higher than the earlier “consensus” range of -0.1 to -0.3 based on U.S. data, although they fall within that range when Spain and Portugal are included. Overall, they conclude (p.47):

Firstly, the results suggest that a rise in the minimum wage has a negative effect on teenage employment. Secondly, negative employment effects for young adults are generally close to zero or insignificantly different from zero. Thirdly, for prime- age adults, the most plausible specifications suggest that minimum wages have no impact on their employment outcomes.

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