Do Minimum Wage Laws Accomplish Anything?

All the smart people tell us that, one way or another, increasing the minimum wage will change society. Proponents claim raising pay at the low end of the economy will help low-income working families survive in hyper-expensive communities. Opponents claim that artificially increasing employment costs will either drive employers towards adopting innovative automation integrations or to shut down their businesses altogether. Either way, goes the anti-intervention narrative, there will be fewer jobs available.

Well, what’ll it be? Canadian provinces have been experimenting with minimum wage laws for many years. And since 2021, the federal government has imposed its own rate for employees of all federally regulated industries. There should be plenty of good data out there by now indicating who was right.

Historical records on provincial rates going back decades is available from Statistics Canada. For this research, I used data starting in 2011. Since new rates often come into effect mid-year, I only applied a year’s latest rate to the start of the following year. 2022 itself, for simplicity, was measured by the new federal rate, with the exception of British Columbia who’s rate was $0.10 higher than the federal rate.

My goal was to look for evidence that increasing statutory wage rates impacted these areas:

• Earnings among workers in full-service restaurants

• Operating profit margins for full-service restaurants

• Total numbers of active businesses in the accommodation and food services industries

I chose to focus on the food service industry because it’s particularly dependent on low-wage workers and particularly sensitive to labour costs. Outcomes here should tell us a lot about the impact such government policies are having.

Restaurant worker income is reported as total numbers. In other words, we can see how much all of, say, Manitoba’s workers combined took home in a given year. For those numbers to make sense, I adjusted them using overall provincial populations.

Income in British Columbia and PEI showed a strong correlation to increasing minimum wages. Interestingly, BC has consistently had the highest of all provinces’ minimum wage while PEI’s has mostly hung around the middle of the pack. Besides a weak negative correlation in Saskatchewan, there was no indication that income in other provinces either dropped or grew in sync with increases to the minimum wage.

Nation-wide, by weighting results by population numbers, we got a Pearson coefficient 0.30. That means it’s unlikely that wage rate changes had any impact on take-home income.

Did increases harm restaurants? It doesn’t look like it. I used data measuring active employer businesses in the accommodation and food services industries. No provinces showed any impact on business startups and exits that could be connected to minimum wage laws. Overall, Canada’s coefficient value was 0.29 - again a very weak positive relationship.

So restaurants haven’t been collapsing at epic, extinction-level rates. But do government minimums cause a reduction in their operating profit margins? Apparently not. If anything, they’ve become more profitable!

The nation-wide coefficient between minimum wages and restaurant profitability was 0.88 - suggesting a strong correlation. But how could that be happening? Don’t labour costs make up a major chunk of food service operating expenses? Here are a few possible explanations:

• Perhaps many restaurants respond to rising costs by increasing their menu prices. This can work out well if market demand turns out to be relatively inelastic and people continue eating out despite higher prices.

• Higher wages might lead to lower employee turnover, reducing hiring and training costs.

• A higher minimum wage boosts worker incomes, leading to more disposable income in the economy. Although the flip-side is that we can’t see strong evidence of higher worker income.

• Higher wages can force unprofitable, inefficient restaurants to close, leaving stronger businesses with higher market share.

In any case, my big-picture verdict on government intervention into private sector wage rates is: thanks but don’t bother. All that effort doesn’t seem to have improved actual incomes on a population scale. At the same time, it also hasn’t driven industries with workers at the low-end of the pay scale to devastating collapse.

But I’m sure it has taken up enormous amounts of public service time and resources that could undoubtedly have been more gainfully spent elsewhere. More important, as the economist Alex Tabarrok recently pointed out, minimum wage laws have been shown to reduce employment for the disabled and measurably increase both consumer prices and workplace injuries.