BOC Staff: Min Wage Gains Could Lift GDP, CPI By 0.1PPT

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

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