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Determinants of Provincial Minimum Wages Essay

From Vaughan Dickson and Tony Myatt, “The Determinants of Provincial Minimum Wages in Canada,” Journal of Labor Research 23 (2002), 57-68: In the last few years, prompted largely by the work of Card and Kruger (1995), numerous articles on the employment effects of minimum wage legislation have appeared. This renewed interest in how minimum wages affect employment leads naturally to another question: What factors determine the minimum wage? Despite the ubiquity of minimum wage legislation, this question has received surprisingly little attention.

One reason may be that in the U. S. the minimum wage is legislated at the federal rather than at the state level of government. Since this federal wage changes only occasionally, most U. S. studies have been limited to cross-sectional studies that focus on how the characteristics of the states, and the party affiliation of legislators, influence the vote on proposed changes in the federal minimum wage (Silberman and Durbin, 1970; Kau and Rubin, 1978; Bloch, 1980; Seltzer, 1995). [1]

However, as pointed out by Baker et al. 1999), Canada offers some unique advantages for minimum wage studies: Since the Canadian minimum wage is under provincial, not federal jurisdiction, there has been substantial variation in the level and timing of changes in the wage across provinces, thus providing the opportunity to explore a relatively rich panel data set. To date, only one… study (Blais et al. , 1989) has investigated the determinants of provincial minimum wages using a pooled data set extending across eight years (1975 to 1982) and nine provinces…. As noted, U. S. tudies have usually been cross sectional and have examined what variables influenced congressional voting for increases in the federal minimum wage. [3]

For example, Bloch (1993) related state wage levels and proportions of unionized employees to votes by senators to amend the 1977 and 1989 Federal Labor Standards Act and thereby increase the minimum wage. For each year he found only the union variable increased the probability of an in-favor vote – and only for Republicans, since Democrats almost universally support minimum wage increases.

An earlier contribution is Silberman and Durden (1976) who examined congressmen’s votes for the 1973 amendment to increase the minimum wage. Using variables for each congressional district, they found larger political contributions by unions and larger proportions of low-income families increased the probability of an affirmative vote, while larger campaign contributions from small business and larger proportions of teen-age workers reduced the probability. Kau and Rubin (1978) expanded Silberman and Durden’s analysis to five separate cross sections covering five legislated increases in the federal minimum wage between 1949 and 1974.

They found that higher state wages and a measure of the congressperson’s liberalism were always positively and significantly associated with votes for, while percentage of blacks in the state was negatively related, but not significant, in all the cross sections. Unionization in the state’s work force and political party of the legislator were never significant; the latter result probably occurred because northern and southern Democrats typically voted on opposite sides. More recently, Seltzer (1995) explored support in both the House and Senate for the 1938 introduction of the federal minimum wage law.

He found variables representing small business and low-wage workers decreased support for the bill, while ideology (liberals for, conservatives against) was also important. To anticipate future problems, Seltzer emphasized that not only are some variables inevitably theoretically ambiguous (a low-wage worker may rationally support or oppose minimum wage increases depending on whether job loss is expected), but also the coefficients on some variables must be interpreted cautiously.

For example, should the coefficient for a variable measuring teen workers in the labor force be interpreted as their demand for higher wages, or does the coefficient better reflect the demands of well-organized firms that disproportionally hire younger workers? In contrast to the U. S. , Canada presents a better opportunity to study variations in minimum wages across jurisdictions and time, so it is perhaps surprising that the only study, to our knowledge, that examines Canadian minimum wage determination is Blais et al. 1989).

They related the minimum wage, measured as the minimum wage divided by the average manufacturing wage, to the percentages of union workers, women, and 15 to 19-year-olds in the labor force, the current year unemployment rate, the inflation rate, the percentage of employment in small firms (less than 20 employees), and a “convergence” variable that measures average manufacturing wages in a province divided by average wages in Canada.

This model was tested with ordinary least squares for a pooled sample covering nine provinces for the years 1975 to 1982, with no fixed effects for provinces or years. All variables had negative coefficients that were significant at the 5 percent level, except for the union variable which was, unexpectedly, negative and insignificant.

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