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The Impacts of Minimum Wage Increases on the Canadian Economy

Author

Listed:
  • Dany Brouillette
  • Calista Cheung
  • Daniel Gao
  • Olivier Gervais

Abstract

This note reviews the channels through which scheduled minimum wage increases over the coming years may affect Canadian economic activity and inflation and assesses their macroeconomic impacts. From reduced-form estimates of direct minimum wage pass-through, we find that consumer price index (CPI) inflation could be boosted by about 0.1 percentage point (pp) on average in 2018. A structural general equilibrium simulation suggests that minimum wage increases would reduce the level of gross domestic product by roughly 0.1 per cent by early 2019 and boost CPI inflation by about 0.1 pp. While the net impact on labour income would be positive, employment would fall by 60,000—a number that lies in the lower part of a range obtained from an accounting exercise (30,000 to 140,000). Consumption would decline because higher 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 gains or participation in the labour force, but the signs of these longer-term effects are ambiguous.

Suggested Citation

  • Dany Brouillette & Calista Cheung & Daniel Gao & Olivier Gervais, 2017. "The Impacts of Minimum Wage Increases on the Canadian Economy," Staff Analytical Notes 17-26, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-26
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    References listed on IDEAS

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    Cited by:

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    2. Natalia Mishagina & Claude Montmarquette, 2018. "The Demand for Economic Policies, Beliefs, and Willingness-to-Pay: The Case of the Minimum Wage Policy in Quebec," CIRANO Project Reports 2018rp-14, CIRANO.
    3. Young Cheol Jung & Adian McFarlane & Anupam Das, 2021. "The effect of minimum wages on consumption in Canada," The Economic and Labour Relations Review, , vol. 32(1), pages 65-89, March.
    4. Leila Sabokkhiz & Fatma Guven Lisaniler & Ikechukwu D. Nwaka, 2021. "Minimum Wage and Household Consumption in Canada: Evidence from High and Low Wage Provinces," Sustainability, MDPI, vol. 13(12), pages 1-20, June.

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    More about this item

    Keywords

    Labour markets; Recent economic and financial developments;

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J - Labor and Demographic Economics
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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