The ups and downs of minimum wage

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by Diane Galarneau and Eric Fecteau

[Release from The Daily] [Full article in PDF]

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• Overview of the study
• Introduction
• The real minimum wage is similar to the level observed in the late 1970s
• A ratio approaching the values of the mid-1970s
• Recent rise of the ratio in most provinces
• Recent rise in the proportion of employees paid at minimum wage
• The profile of employees paid at minimum wage has not changed
• Conclusion
• Notes
• Related material for this article

Text begins

Introduction

Minimum wage studies generate substantial interest, given the links often made between the minimum wage, employment, and poverty. While there is no consensus on how the minimum wage affects poverty and inequality,^Note 1 the association with employment is well-documented. In Canada, the effects of an increase in the minimum wage on total employment would typically be small or non-existent.^Note 2 Rather, an increase in the minimum wage would seem to be associated with a decrease in employment among teenagers,^Note 3 who are most likely to be paid at this hourly rate.

The extent of the effect on employment depends on a number of factors,^Note 4 including the ratio of the minimum wage to the average hourly earnings (AHE). The higher this ratio—that is, the closer the minimum wage to average hourly earnings (all things being equal)—the more workers are affected by minimum wage legislation and the greater the effects on employment.^Note 5 These effects do not necessarily take the form of layoffs, but may instead take the form of reduced hiring, which diminishes the job prospects of teenagers.^Note 6

This article begins by examining how the real minimum wage, average hourly earnings and the ratio between these two indicators have evolved since 1975, based on data from the Survey of Employment, Payrolls and Hours (SEPH) and the Labour Force Survey (LFS).

Then, the article investigates the slight increase in the proportion of employees paid at minimum wage, which went from 5.0% in 1997 to 6.7% in 2013. It also looks at the characteristics of employees paid at minimum wage to determine whether the recent increase in the proportion of such workers is due to a change in their profile. In other words, are some groups of employees more likely to be paid at minimum wage than in the late 1990s?

The real minimum wage is similar to the level observed in the late 1970s

In Canada, minimum wage legislation is of provincial jurisdiction, and therefore may vary from one province to another. A value for the minimum wage for Canada can be obtained by calculating the average of provincial minimum wages, weighted by the employment levels of each of the 10 provinces since 1975. These values can then be adjusted for inflation using the consumer price index (CPI) for each province to obtain a “Canadian” real minimum wage (in 2013 dollars).

Since 1975, the average Canadian real minimum wage varied between $7 and $11, peaking in 1975 and 1976 (Chart 1). Subsequently, the average minimum wage declined to under $8 in the mid-1980s, and did not change much until 2005. It then began rising again, reaching approximately $10 in 2010 and stayed around this level up to 2013.

In the case of average hourly earnings (AHE), the level may vary, depending on the source. In this article, two sources are used: the Survey of Employment, Payrolls and Hours (SEPH), which collects information from businesses on the wages paid to their employees; and the Labour Force Survey (LFS), which collects data from households on the 'usual' earnings of paid workers (see Data sources, methods and definitions). Four versions of the AHE were calculated:

1. The AHE of employees paid by the hour in the manufacturing sector in the SEPH from 1975 to 2013
2. The AHE of employees paid by the hour for all industrial sectors in the SEPH from 1983 to 2013
3. The AHE of employees paid by the hour for all industrial sectors in the LFS from 1997 to 2013^Note 7
4. The AHE of all paid employees in the LFS (regardless of the method of compensation) from 1997 to 2013.

The SEPH series on the manufacturing sector is the only one going back to 1975. According to that series, the AHE of employees paid by the hour in the manufacturing sector remained fairly stable at around $22 (in 2013 constant dollars) throughout the period. However, this sector’s share of total employment declined over time, from 19% in 1975 to 10% in 2013. Furthermore, the gap between the AHE of the manufacturing sector and the AHE of all sectors combined also declined.^Note 8 As a result, the trends exhibited by the manufacturing sector became less representative of the total paid workforce in recent years.

The series of employees paid by the hour in all industrial sectors in the SEPH, which begins in 1983,^Note 9 is more representative of the Canadian paid workforce. According to this series, the AHE remained stable at around $20 until the mid-2000s but gradually increased in recent years, to more than $22 in 2013.

Description for Chart 1

This recent upward trend is also confirmed by the two LFS series, which both begin in 1997. In the first LFS series on employees paid by the hour, the AHE went from $18 in 1997 to $20 in 2013. In the LFS series on all employees, the AHE went from $21 to $24 during the period. The higher AHE levels in the latter series are due to the fact that the AHE covers not only employees paid by the hour but also employees with a fixed salary, who have a higher AHE.

A ratio approaching the values of the mid-1970s

An important indicator of how increases in the minimum wage affect employment is the ratio of the minimum wage to the average hourly earnings (AHE). Since the AHE remained fairly stable throughout the study period, variations in the ratio are largely attributable to changes in the real minimum wage.

Four ratios were calculated based on the four versions of the AHE described above. Although the ratio varies over time and depending on the series used, it is possible to distinguish four major periods: a period of decline between 1975 and 1986, a period of increase between 1986 and 1997, a new decline extending to 2005, and, lastly, another rise between 2005 and 2013 (Chart 2).

Description for Chart 2

During the first period, from 1975 to 1986, the series based on SEPH data for the manufacturing sector shows a decline, with the ratio going from a high of 47% in 1976 to a low of 35% in 1986. This decrease was the result of a greater decline in the minimum wage (from $11 to less than $8) than in the AHE (from $23 to $22).

During the second period, from 1986 to 1997, the minimum wage increased by approximately $1 per hour while the AHE remained relatively stable (at nearly $22 in the manufacturing sector and nearly $20 in all sectors combined), which caused the ratio to rise by 5 to 6 percentage points, depending on the series used.

During the third period, from 1997 to 2005, the ratio fell again, dropping 3 to 4 percentage points, since the real minimum wage declined by roughly 40 cents while the AHE rose from 50 to 80 cents, depending on the series.

Finally, starting in 2005, the ratio was generally trending upward, regardless of the series used. The increase mainly occurred from 2005 to 2010, with the ratio subsequently remaining stable (through to 2013). According to the SEPH series on all industrial sectors, the ratio went from 41% in 2005 to 46% in 2013. In the case of the SEPH series on the manufacturing sector, the ratio rose even more (from 37% to 45%). As for the ratio based on the LFS’s AHE, the increase went from 39% to 42% for all employees and from 45% to 49% for employees paid by the hour.

Recent rise of the ratio in most provinces

In 1975, the real minimum wage (in 2013 dollars) stood at nearly $10 an hour in all provinces. Even though it evolved differently in each province during the period, in 2013 it was again hovering around $10 in most provinces.

The ratio of the minimum wage to the AHE of each province fluctuated in recent decades, as has been the case in Canada as a whole. However, in the past 10 years, the ratio increased in most provinces (Charts 3.1 to 3.3). This is because the minimum wage has grown more rapidly than the AHE in recent years.^Note 10

Description for Chart 3.1

 

Description for Chart 3.2

 

Description for Chart 3.3

In the Atlantic provinces, the increase started in 2005, with the ratio gaining between 9 and 11 percentage points in each of these provinces. In Newfoundland and Labrador, the ratio even went from 35% in 2005 to 50% in 2010, before falling back to 44% in 2013. In Ontario, the ratio gained more than 7 percentage points starting in 2003 (from 40% to 47%), while in British Columbia it jumped 7 percentage points from 2010 to 2013 (going from 39% to 46%). The ratio also rose in Alberta (starting in 2004) and Manitoba (starting in 2005) by 6 and 7 percentage points respectively.

In contrast, the ratio fluctuated less in Saskatchewan and in Quebec over the period. In Saskatchewan, the ratio varied between 40% and 44% during the whole period, while the ratio in Quebec varied between 44% and 48% during the 2000s.^Note 11

Recent rise in the proportion of employees paid at minimum wage

Since the LFS began collecting information on the remuneration of paid employees, it has been possible to track the number of employees paid at minimum wage and to express their number as a proportion of the total number of paid employees.^Note 12 Since 1997, there has been a modest increase, from 5.0% to 6.7%, in the proportion of those who are at minimum wage. This increase has sometimes been interpreted as an increase in the proportion of low paid jobs.

However, an increase in the minimum wage can “automatically” increase the proportion of paid employees at minimum wage. This is because when the minimum wage is revised upward, some of the employees whose wage was formerly above the old minimum wage level are now paid at the new rate, and join those who were already earning the minimum wage.

This effect was quite clear among young employees aged 15 to 19 between 2003 and 2010, when the minimum wage increased in a number of provinces. During this period, the rate of young employees working at minimum wage went from 30% to 45% (Chart 4). This increase coincided with a decrease in the proportion of employees in this age group who were paid at a rate between the minimum wage and 10% above the minimum wage; their proportion went from 31% to 21% (not accounting for the possibility of job losses).

Description for Chart 4

Thus, there is a positive correlation between the minimum wage to AHE ratio and the proportion of employees paid at minimum wage. The higher the ratio and the closer the minimum wage to the AHE, the greater the increase in the proportion of employees paid at minimum wage. As a result, these two indicators typically move in the same direction (Chart 5).^Note 13

Description for Chart 5

The profile of employees paid at minimum wage has not changed

Has the increase in the minimum wage been proportionally greater for some population groups? The most appropriate source to answer this question is the LFS, since it has wage data going back to 1997 in addition to a large range of sociodemographic characteristics.

In 2013 (as in 1997), youth, women and persons with a low level of education were the groups most likely to be paid at minimum wage (Table 1). In 2013, 50% of employees aged 15 to 19 and 13% of those aged 20 to 24 were paid at minimum wage. Among women, the rate was 8% (compared with 6% among men); among the least-educated, specifically those with less than a high school diploma, the proportion was 20%, compared with less than 3% among university graduates.

Table 1
Proportion of minimum wage employees and distribution of employees paid at minimum wage, 1997 and 2013
Table summary
This table displays the results of Proportion of minimum wage employees and distribution of employees paid at minimum wage Proportion at minimum wage, Distribution of employees at minimum wage, 2013 and 1997, calculated using percentage and thousand units of measure (appearing as column headers).

	Proportion at minimum wage		Distribution of employees at minimum wage
	2013	1997	2013	1997
	percentage		thousand
Total	6.7	5.0	1,007.1	568.5
Sex	percentage
Men	5.5	3.9	41.1	40.8
Women	8.0	6.2	58.9	59.2
Age group
15 to 19	50.2	31.5	39.8	36.0
20 to 24	13.4	9.7	21.0	20.9
25 to 34	3.5	3.0	12.0	16.0
35 to 64	2.8	2.3	24.8	25.8
65 and over	7.0	8.3	2.5	1.3
Education (15 years of age and over)
Less than a high school diploma	20.4	11.3	29.3	40.1
High school diploma and some postsecondary education	10.2	5.9	41.8	36.3
Postsecondary diploma	3.4	2.7	18.2	17.7
University degree	2.6	1.6	10.6	5.9
Work arrangement
Full time	3.4	2.8	41.0	45.0
Part time	21.8	14.9	59.0	55.0
Industry
Goods	2.6	2.1	8.3	10.7
Services	7.8	6.0	91.7	89.3
Retail trade	17.4	10.2	32.9	25.3
Food and accommodation	26.9	21.0	27.8	28.7
Province
Newfoundland and Labrador	5.9	9.2	1.2	2.7
Prince Edward Island	9.3	4.7	0.6	0.4
Nova Scotia	5.9	7.9	2.3	4.5
New Brunswick	7.9	6.8	2.4	3.2
Quebec	6.2	3.6	21.5	17.2
Ontario	8.9	5.6	51.5	43.4
Manitoba	6.0	3.9	3.2	2.9
Saskatchewan	4.5	5.7	2.0	3.5
Alberta	1.8	3.0	3.3	6.1
British Columbia	6.4	6.1	12.0	16.1
Source: Statistics Canada, Labour Force Survey, 1997 and 2013.

Low educational attainment is more often associated with minimum wage among women. In 2013, the rate of working at minimum wage for women aged 25 to 64 with less than a high school diploma varied between 11% and 15%, compared with 4% and 5% among their male counterparts (Chart 6).

Description for Chart 6

Some employment characteristics were also associated with a higher rate. This was the case among part-time employees, 22% of whom earned the minimum wage, as well as employees in the retail trade (17%) and food and accommodation sectors (27%).

Minimum-wage policies affected relatively few employees in Alberta and Saskatchewan. The lowest rate of work at minimum wage in 2013 was in Alberta, at scarcely 2%.^Note 14 Saskatchewan followed with a rate of less than 5%. In contrast, Prince Edward Island and Ontario had the highest proportions (nearly 9%).

Between 1997 and 2013, the proportion of employees paid at minimum wage increased across the board (except for those aged 65 and over and employees in some provinces such as Alberta, Saskatchewan, Newfoundland and Labrador, and Nova Scotia), meaning no subgroups are more likely today than in 1997 to be represented among employees paid at minimum wage.^Note 15

As a result, the profile of employees paid at minimum wage did not change much during the period, since the great majority of them are still youth, part-time employees and employees in service industries. Hence, 61% of minimum wage employees were aged 15 to 24 in 2013 (57% in 1997). Also, 59% of them held a part-time job in 2013 (55% in 1997). Finally, in 2013, 61% of all minimum wage employees were in the retail trade or food and accommodation sectors (54% in 1997).

Conclusion

This article has examined the change, in constant dollars, of the minimum wage, average hourly earnings (AHE) and the ratio between these two indicators in Canada and the provinces since 1975. Although the real minimum wage varied over the period, the 2013 minimum wage was almost identical to levels seen in the mid 1970s. To study the ratio between the minimum wage and average earnings, several versions of the AHE were used, with some covering a relatively long observation period, and others covering a shorter period. Although the ratio results vary depending on the source used for the AHE, four periods can be identified: a decrease in the ratio, covering the years 1975 to 1986; a rebound, between 1986 and 1997; then another decline, between 1997 and 2005; and finally another increase, between 2005 and 2013. Since the AHE remained relatively stable throughout the study period, changes in the ratio are largely attributable to changes in the real minimum wage.

Between 1997 and 2013, the proportion of employees paid at minimum wage went up, from 5.0% to 6.7%. This increase mainly occurred between 2003 and 2010, when a number of provinces raised their hourly minimum rate. Increases in the minimum wage often correspond with an increase in the proportion of employees paid at minimum wage. This was especially true for paid workers aged 15 to 19: between 2003 and 2010, the proportion paid at minimum wage rate increased by 15 percentage points, while the share of those paid at a rate between the minimum wage and 10% above the minimum wage decreased by 10 percentage points during the same period.

While the share of employees earning the minimum wage increased between 1997 and 2013 for most population groups, the groups most likely to be paid at this wage remained the same. In 2013, like in 1997, youth, less-educated individuals and part-time employees were more likely to be paid at minimum wage. The retail trade sector and the food and accommodation sector still had the largest proportion of workers paid at minimum wage.

Diane Galarneau is a senior analyst in the Labour Statistics Division of Statistics Canada and Eric Fecteau is a student participating to the University of Ottawa co-operative education program.

Notes