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By Yali N'Diaye
     WASHINGTON (MNI) - Scheduled increases in the minimum wage could boost
Canada's GDP level and CPI by roughly 0.1 percentage point by early 2019 based
on a structural general equilibrium model, Bank of Canada staff said in a
research paper Friday.
     Based on a simple reduced-form model estimating the direct pass-through
effect, minimum wage increases would boost CPI by 0.1 percentage point on
average next year. The impact would be 0.0 to 0.1 percentage point in 2019, said
the report titled "The Impacts of Minimum Wage Increases on the Canadian
Economy".
     "The impact of the pass-through in 2017 and 2019 is lower than in 2018
given the smaller increases in minimum wages in those years".
     The central bank anticipates that higher minimum wages will boost real
wages, hence raising businesses' marginal costs. "A fraction" of firms are
expected to respond by raising their prices in the short term, leading inflation
higher.
--Lower Employment, Consumption
     On the other hand, both employment and consumption are likely to be
negatively affected.
     Weaker labor demand would translate into fewer jobs and a 0.3% decline in
hours worked.
     "While the net impact on labor 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)", said the report.
     On the consumption front, the central bank also found that higher minimum
wages would have a negative impact as they "would elicit a slight interest rate
increase, which would more than offset the higher labor income."
--Short-Term Growth Potential Unchanged
     The research also concluded that Canada's potential output should remain
unchanged in the short term. The BOC estimated in its October Monetary Policy
Report that Canada's potential output growth ranges between 1.0% and 1.6% in
2017, 1.1% and 1.7% in 2018, and 1.1% and 1.9% in 2019.
     "Longer-term effects are possible through automation, productivity gains or
participation in the labor force, but the signs of these longer-term effects are
ambiguous," the report said.
     The most important minimum wage increases are planned in the oil-producing
province of Alberta and the manufacturing province of Ontario.
     In Ontario, the minimum wage will be raised to C$14 per hour from January
2018 and C$15 from January 2019, from C$11.60 currently. It will then be indexed
on inflation.
     In Alberta, the minimum wage will rise to C$15 per hour in October 2018
from C$13.60 currently.
     In Canada, the BOC estimates that 8% of employees work at the minimum wage
and past experience shows that such raises have affected 15% of employees at the
lowest wages.
     How the BOC looks at the impact of these raises will prove important as it
is particularly focused on wage-inflation dynamics to decide when its next
tightening will be.
     In a December 14 speech, Governor Stephen Poloz said that while he was
encouraged by recent signs of a pick-up in wage growth, "it will take a while
before they become trends."
--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com
[TOPICS: MACDS$,M$C$$$]