Q: What is the inflationary effect of increasing the minimum wage? How will it effect the price consumers pay for things like a hamburger at a fast food restaurant?
A: In September B.C.'s minimum wage will increase from $10.25 per hour to $10.45 per hour. Under the new legislation, the provincial minimum wage will increase annually by a percentage equal to the annual inflation for the previous year.
The minimum wage for customer service staff who primarily serve liquor (ie. bar servers) will be set $1.25 per hour less than for regular workers. So in September, liquor servers will earn a minimum $9.20 per hour.
However, the B.C. Federation of Labour is calling for the province to increase the minimum wage to $15 per hour. The labour rights group estimates under the new legislation, assuming average annual inflation, it will take until 2034 for the province's minimum wage to reach $15 per hour.
Just south of the border, the city of Seattle has introduced a phased increase to the minimum wage that will see workers receive a minimum $15 per hour by 2017 for larger employers and 2021 for smaller companies.
In my March 30 column I addressed the question of whether a B.C. city like Prince George could set its own minimum wage higher than the provincial minimum (short answer: no.) That column, with plenty of background information about who earns minimum wage in Canada, can be found on The Citizen's website at: http://bit.ly/1DBlyqc.
But what will the province's legislated increase to the minimum wage cost consumers? And how much would the B.C. Federation of Labour's proposed $15 per hour minimum wage increase prices?
Most of the economic research regarding minimum wages focuses on its effects on employment numbers, not inflation numbers. That is a complex subject worthy of its own column, and I won't get into it now (short answer: depends on who you ask, and where they sit on the political spectrum).
In March 2004 British economist Sara Lemos, from the University of Leicester, wrote a discussion paper on the issue of minimum wage and inflation for the Institute for the Study of Labour in Bonn. For the paper, Lemos analyzed and compiled the results of more than 20 studies on the subject.
Lemos wrote that employers respond to the higher cost of labour caused by minimum wage increases by "reducing employment, reducing profits or raising prices."
"While there are hundreds of studies on the employment effect of the minimum wage, there is less than a handful of studies on the its profit effects and only a couple dozen studies on its price effects," she wrote.
The studies surveyed by Lemos used five different methodologies, and either estimated the impact of a minimum wage increase on national inflation as a whole, or estimated price impacts for specific industries.
"Despite the different methodologies, data periods and data sources, most studies found that a 10 per cent U.S. minimum wage increase raises food prices by no more than four per cent, and overall prices by no more than 0.4 per cent," Lemos wrote in her conclusion. "This is a small effect."
In fact many of the studies found a much smaller impact on prices than that.
A 2001 study analyzing the impact of the 1996-1997 minimum wage hike in the U.S. found a 10 per cent increase in minimum wage raised overall prices by 0.25 per cent. The study found the price of food consumed at home (primarily groceries) increased by 0.8 per cent and food eaten outside the home (primarily restaurants) by 1.2 per cent.
According to Statistics Canada, inflation has hovered around two per cent from 1995 to 2014. The lowest year in that spread was 2009, during the worst of the Great Recession, when prices only rose 0.3 per cent. The highest was in 2011, when the post-recession recovery saw prices spike 2.9 per cent.
B.C.'s proposed $0.20 minimum wage increase amounts to a 1.95 per cent wage increase.
If Lemos' analysis is correct, it should result in a 0.05 to 0.08 increase in overall prices -basically an extra nickel for every $100 you spend. Given that Statistics Canada pegged annual inflation (Consumer Price Index) at 1.2 per cent in March, the increase should be essentially invisible against the background of other rising costs.
The impact on the price of fast-food meal should rise between 0.24 and 0.8 per cent - or less than one cent on a typical $10 fast-food meal.
The B.C. Federation of Labour's proposed $15 per hour minimum wage would be a 46.3 per cent hike.
If imposed immediately, rather than phased in as it has been in Seattle, the effect would be more noticeable. Lemos' research suggests that companies do tend to react fairly quickly to inflation increases, increasing prices to meet the additional costs in six months or less after the minimum wage increase.
Overall inflation could rise by as much as 1.85 per cent -about the equivalent of one year's worth of normal inflation, or less than a twoonie per $100 you spend.
In the fast food industry - a major employer of minimum- and low-wage employees -costs could rise between 5.5 and 18.5 per cent. That would increase the price of a $10 fast food meal to between $10.55 and $11.85.
However, there is some newer research that suggests the impact of minimum wage increases on the fast-food industry may not be as severe as previously predicted.
A 2013 study by Jeannette Wicks-Lim and Robert Pollin of the Political Economy Research Institute at the University of Massachusetts, Amherst examined the impact of a proposed increase in the U.S. federal minimum wage from $7.25 per hour to $10.50 per hour -a 44.8 per cent increase.
Their analysis, based on the latest U.S. data and average operating costs for a typical fast-food franchise, estimated that a 44.8 per cent increase in minimum wage would only increase costs to a typical fast-food franchise by 2.7 per cent.
A 2.7 per cent increase would mean that a $10 fast food meal would cost $10.27 -basically an extra quarter for a meal, or a dime for just a burger.
Part of the reason why Wicks-Lim and Pollin found a smaller increase in prices than expected is because of the approximately 3.61 million people employed by the fast-food industry in the U.S., only about one million earn minimum wage or near-minimum wage.
A further 1.3 million American fast food employees earn between $8.50 and $9.50 an hour, so although they would receive a raise it would not be as high as those in the lowest group.
So, in short, research suggests that raising the minimum wage would have an inflationary impact - but that impact if fairly small. Even instantly raising the minimum wage to $15 an hour would likely only bump B.C.'s annual inflation from the low end of average to the high end of average for one year.
Personally, I'd be happy to pay a little more to know the person serving me makes a livable wage.
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