The effect of minimum wages on consumption in Canada

Abstract

We use Canadian data over the period of 1991Q1 to 2019Q2 to examine the effect of higher minimum wages on consumption, measured as the real retail trade sales per adult population. Such an examination is rare in the extant literature and it is timely given the increasing debate concerning the stimulus versus inflationary effects arising from wage polices because of COVID-19 global pandemic. We apply the autoregressive distributed lag model to determine the causal relationship between these variables. We find one long-run cointegrating relationship that runs from the real minimum wage to the real retail trade sales. In addition, we find that a 1% increase in the minimum wage is associated with almost a 0.5% increase in real retail trade sales in the long run. While our findings rest on several statistical assumptions, there is strong evidence in support of the position that minimum wage strengthens aggregate consumer spending, and thereby the standard of living, economic growth and stability. This is a position that differs from the conclusions drawn from mainstream academic and policy debates on the economic usefulness and efficacy of minimum wage increases. JEL Codes: C30, E21, E24

Minimum Wage and Household Consumption in Canada: Evidence from High and Low Wage Provinces

“…Thus, a one percent increase in provincial MW will lead to a 0.244 and 0.272 percentage increase in annual household consumption across the low-and high-wage provinces, respectively. Assuming a sticky-price scenario, the MW rises may therefore possibly raise effective demand, which further induces consumption-driven economic growth [6,34,35]. According to [14,36] in the long-term, the effect of MWs on economic aggregates is greater than in the short-term.…”

“…The literature focusing on household consumption has increased in the recession period due to the greater significance of expenditures. In addition, apart from a very recent study by [6], no other paper has attempted to analyze the relationship between the MW and consumption. Their analysis is the only paper in Canada to study consumption and the MW relationship, however, they do not address provincial heterogeneity in the MW context.…”

“…While the relationship between Sustainability 2021, 13, 6540 2 of 20 the MW and employment has been explored in the previous studies, little is known about the linkage between the MW and household consumption in Canada. To our understanding, [6] work is the only study on the MW and consumption relationship in Canada. The consumption variable, as used in [6], is proxied as real retail trade sales normalized to the adult population and results indicate a positive long-term relationship between the MW and the real values of retail sales trade.…”

“…To our understanding, [6] work is the only study on the MW and consumption relationship in Canada. The consumption variable, as used in [6], is proxied as real retail trade sales normalized to the adult population and results indicate a positive long-term relationship between the MW and the real values of retail sales trade.…”

“…It considers provincial heterogeneity in MW policies in the analysis of the relationship between the MW and consumption at the household level in Canada. Additionally, it employs a more robust empirical methodology than the previous analysis by [6], since it employs panel data rather than a pure time-series, which assumes provincial homogeneity. It examines the effect not only over the long-term but also over the short-term, taking into account different wages groups.…”