In the comments of an earlier post we discussed the difficulty entry-level applicants are having in obtaining jobs. In this post I discuss 3 changes from the last 12 months making it difficult for workers with low- to no-skills find employment.
When an employer has a low-skill task that needs to be done – whether it be low level data entry or manual labour, she has a number of alternatives (or substitutes) to hiring a low-skilled worker. She could:
- Find a technological solution. Rather than hiring another worker, is there a piece of equipment or machinery that will do the job, or make existing workers more productive so another person is not needed? The automated checkouts in grocery stores might be a good example, though I've often wondered how much labour they truly save.
- Outsource/offshore/subcontract. Instead of doing the work in-house, can we pay someone else to do it? Off-shoring has become easier than ever for even the smallest of businesses thanks to services such as eLance and Mechanical Turk.
- Do without. Instead of having 8 cash-registers open, can we get away with having only 7?
Naturally not each substitute is applicable to each situation, but in many cases 1 or 2 would apply.
So what are three changes? I'll go through them from (arguably) least to most important:
1. Employer Side EI Premium Hike
Overall a small-hike for employers: 7 cents per $100 starting in January 1, 2011. Over time this usually ends up being paid by workers (through lower wages), though due to the presence of a price-floor (minimum wage) this more likely manifests itself in a reduction in jobs. For a low-income earner making $10,000 in a year an employer will pay $249.20 in additional EI premiums, up $7 from 2010's $242.20 amount. The employer will also pay $321.75 in CPP contributions, which is unchanged from 2010. The small increase in EI premiums should have a very slight, but negative, effect on jobs.
2. Rising Canadian Dollar
Consider the case of outsourcing. When a Canadian company outsources to India or Bulgaria or Indonesia, typically the contract is in U.S. dollars. A company has a data entry project, with the alternatives being hire someone or outsource. In early 2009 when the Canadian dollar was at 80 cents, a $2000 USD price quote for outsourcing equaled $2500 Canadian. Today at parity, that same quote now is $2000 (20% less), making the outsourcing option far more attractive.
3. Increases in the Minimum Wage
In Ontario, the (nominal) minimum wage has risen 50% since 2004, from $6.85/hr to $10.25/hr (source), including a 75 cent hike in 2010. Since it is possible on eLance and Mechanical Turk to hire workers in say, the Philippines or Bulgaria for $3-4/hr, domestic workers face a tough time competing for jobs which can be offshored. That's not to suggest that the minimum wage is necessarily bad for the low-skilled. I suspect most low-skilled workers would rather live in a world with a $10.25/hr minimum wage where it's harder to find worker than a $6.85/hr one where it is easier. But given the possible alternatives (technology, outsource, do without) a higher minimum wage does reduce low-skill employment.
Outlook for the Future
A strengthened domestic economy will certainly assist low-skilled labour. But they won't be helped by EI premiums that are set to rise again in 2012 and a Canadian dollar that continues to strengthen.
Worthwhile Canadian Initiative 
a higher minimum wage does reduce low-skill employment.
Only in your textbooks. In the real world though, not at all.
Yeah, I must have misread all those studies. And all those payments I’ve been sending to India? All in my head.
Is nuh-uh really your response? Show me the jobs that have been lost due to any of the hundreds of increases in minimum wage that have occurred just in Canada. Hell, at this point I’ll accept even one lost job attributable to a rise in minimum wage as evidence.
How about the guy I fired?
Specifically – was paying a guy to do web work for us. Minimum wage kept going up. Sent the work to India instead. There. One job. What do I win?
And if anecdotal evidence isn’t enough, you can read – or have translated – Pierre Fortin’s survey of the empirical literature.
Mike – the title of the post is “low skill job” – and the example of jobs being killed off by the rising minimum wage is web work?
Scary.
Forgot higher real energy costs make more uneconomic. They aren’t back to 147 but still far higher than the 30-50 of old.
“Mike – the title of the post is “low skill job” – and the example of jobs being killed off by the rising minimum wage is web work?”
Low level, data entry stuff. But I’m sure if I posted a job @ minimum wage for very basic HTML coding I could have 100 applicants within 3 weeks.
What do I win?
The Cheap Bastard of the Year Award.
Pierre Fortin’s survey of the empirical literature.
Nice wild goose chase, Stephen.
Here in California, the situation might surprise you. A typical large grocery store will have a few lanes open with cashiers, but there are then also a half-dozen guys or more in the back, “waiting”. The union work rules at the two chains I’m familiar with say that the lines have to be X long for Y minutes, and then one more cashier can be called up. Then, the process repeats. As soon as the lines clear, all the extra guys rotate back to waiting in the back.
So this is a very slow ratchet. Sure you hire a lot of guys, but very few actually do any work for the hours they are clocked in–they goof off in the back. Hiring one more guy is a very ineffective solution because of the work rules–but its impossible to change the work-rules. We went through a two month strike. The managers ran the checkout almost as well–no breaks in back, but the union won the public relationships and customers started boycotting the stores. So the work-rules stay.
Enter automated checkouts. The customers like them because they clear through faster–lots of machines ready to go counterbalances the slightly slower process and the hassle of self-checkout. Best of all, one cashier supervises all the machines and is always working–not in the back goofing around. They can be paid a better wage without strangling the business.
FYI, other chains without these work-rules are insurgent and are grabbing market share gradually. I’m thinking of the German run Trader Joes and the wholesale chain Costco, but also a lot more small operators with only a dozen stores or less. These places staff all cash registers, all the time, and the cashiers move fast. The prices are lower and the customer service experience is higher.
The labor costs have gotten so bad that the pricing advantage of the large chains on the products isn’t enough to compensate and exclude the upstarts.
Thanks for posting that link, Stephen. One thing I love about Google Chrome is how it automatically translates webpages.
RE: Minimum wage costing jobs. Think of call-centers, data entry, basic HTML coding.
If the minimum wage were still $6.85, the hourly cost of having an employee would be $7.36/hr at 2011’s CPP + EI rates. But now it’s $11.01 ($10.25 + CPP = EI). (And that’s not including any other expense such as office space, etc.)
I can get someone in India to do the same job for $3-4/hr. All else equal I’d prefer to have the Canadian, as there is a productivity loss (language and cultural barriers, different skills), monitoring costs. Even the time-zone is a bit of a pain.
There’s some point at which I’m indifferent between hiring the person in India or hiring a Canadian. It’s certainly more than $4. But to assume that point of indifference cannot possibly be between $7.36 and $11.01 is just weird.
That’s why so many businesses outsource these to India – because for many tasks it just doesn’t make economic sense to pay someone $11/hr here compared to $3-4/hr there.
“The Cheap Bastard of the Year Award.”
Flattery will get you nowhere with this Scotsman.
If the minimum wage were still $6.85…
…you could still hire someone in India to do the job for $3-$4 less. This is not an effect of increases to the minimum wage but an effect of cheaper labour in another region. And that labour will always be cheaper somewhere in the developing and undeveloped parts of the world regardless of whether or not the minimum wage rises here.
“…you could still hire someone in India to do the job for $3-$4 less. This is not an effect of increases to the minimum wage but an effect of cheaper labour in another region. And that labour will always be cheaper somewhere in the developing and undeveloped parts of the world regardless of whether or not the minimum wage rises here.”
Right, but there are additional costs, as I pointed out: language and cultural barriers, different skills), monitoring costs. Even the time-zone is a bit of a pain.
Now, it might be the point of indifference is below $7.36, in which case, you’re right the rise in minimum wage did nothing. But to assume that point of indifference cannot possibly be between $7.36 and $11.01 is just weird. In our case, it was the point of indifference. If we could hire someone locally for $7.36, we would, because it’d get rid of a bunch of headaches. But for $11.01/hr? We’ll take some aspirin for our headaches instead.
Nice wild goose chase
My mistake. I had mistaken your request for evidence as a request for evidence.
“I suspect most low-skilled workers would rather live in a world with a $10.25/hr minimum wage where it’s harder to find worker than a $6.85/hr one where it is easier.”
Assuming that this is true, I doubt that it’s of much comfort to those who can’t find a low-skilled job to know that the majority is OK with their unemployment.
“The Cheap Bastard of the Year Award.”
You’re free to hire the fellow to do your blog. I’m sure that Mr. Moffat would be happy to give you his contact info.
“Assuming that this is true, I doubt that it’s of much comfort to those who can’t find a low-skilled job to know that the majority is OK with their unemployment.”
It really isn’t. And it’s just a guess on my part. But I can’t picture a lot of low-income/low-skill workers screaming ‘OH NO!’ whenever the minimum wage is raised.
Its definitely been unfortunate that in the middle of a major recession and low inflation, the minimum wage has risen not once but three times in the US–its up forty percent since 2007.
Outsourcing isn’t free. My observation is that it’s rather expensive and time consuming managing outsourced/off-shored projects, and the productivity and quality almost never stack-up to what you’d get in Canada. Admittedly, my experience is with software and electronics, so it’s not exactly low skill.
I think the firms management got sucked into the promise of lower wages but didn’t figure in the additional costs of managing a project from halfway around the world in a place with a different work ethic etc. They discovered through bitter experience that it didn’t really cost less overall, and in one case repatriated the work and in another had to get the Canadian engineers to handhold the offshore contractor through the project. My guess is that they couldn’t pull the plug on the project because too many big egos where on the line and admitting it was a mistake would have implied heads rolling, so the CYA maneuvering started (blaming the contractor, blaming their underlings, etc).
I had mistaken your request for evidence as a request for evidence.
Your link didn’t lead to evidence. It led to someone referring to evidence. For example;
Canadian work that marked the last decade are mainly those of Baker, Gunderson and colleagues (Baker, Benjamin and Stanger, 1999, Baker 2005; Campolieti, Gunderson and Riddell, 2006). According to the review by Gunderson (2005, 2007)…
In our case, it was the point of indifference.
But that point of indifference also existed before the rise in minimum wage and its doubtful that it changed much since wages even in areas of cheap labour are not static. So labour that costs $7 here and $4 in India is no different than labour that costs $11 here and $8 in India.
There’s a bibliography that you can use to look up the original papers.
Yes there is, Stephen. And if I were a rube I’d surely make use it to prove your point.
Okay, seriously: you have officially removed yourself from the Evidence-Based Community. You aren’t interested in statistical analysis, data analysis, or even taking the trouble to read the work of those who are. Next time you feel like ranting about ignorant, know-nothing right-wingers, remind yourself of this thread.
“Outsourcing isn’t free. My observation is that it’s rather expensive and time consuming managing outsourced/off-shored projects, and the productivity and quality almost never stack-up to what you’d get in Canada.”
We’ve found the same thing. My rule of thumb is that if you don’t get at least a 50% cost savings, it’s not worth it due to the added administrative headaches. But that % would be different for different situations.
“But that point of indifference also existed before the rise in minimum wage and its doubtful that it changed much since wages even in areas of cheap labour are not static. So labour that costs $7 here and $4 in India is no different than labour that costs $11 here and $8 in India.”
Agreed. But our outsourcing costs haven’t doubled in the last 5 years. Particularly when you consider that the rising Canadian dollar has given us a 25-30% cost advantage from forex alone (see point 2). If anything, outsourcing when priced in CAD is cheaper than it was 5 years ago, as the rise in wages in India has been less (in percentage terms) than the rise in the CAD vis-a-vis the USD.
You can’t handle the evidence.
In 2004 there were 621,000 minimum wage jobs in Canada. In 2008 there were 751,400 minimum wage jobs in Canada.
Did any of those studies explain why, despite numerous minimum wage increases over those 4 years, the number of minimum wage jobs increased by 21%?
“Did any of those studies explain why, despite numerous minimum wage increases over those 4 years, the number of minimum wage jobs increased by 21%?”
Isn’t that what you would expect with a minimum wage rise, as a whole host of $8 and $9 jobs that weren’t minimum wage before are now minimum wage?
That’s why you look at studies instead of just grab single pieces of data – to help you control for such factors.
You’re making the post hoc ergo propter hoc mistake. Careful statistical studies – the sort you apparently refuse to look at – do not.
I don’t want to alarm anyone, but it was 25 degrees warmer 6 months ago than it is now. If this holds up, we’ll all be dead by June.
“Did any of those studies explain why, despite numerous minimum wage increases over those 4 years, the number of minimum wage jobs increased by 21%?”
From Google:
GDP 2004: 992 billion
GDP 2008: 1.499 trillion
% change: 51%
So you’re wondering why there are so many fewer min wage jobs than one might expect at first glance?
Isn’t that what you would expect with a minimum wage rise, as a whole host of $8 and $9 jobs that weren’t minimum wage before are now minimum wage?
If that were the case then why doesn’t it hold up over time (see figure 3) despite a steady rise in minimum wage (see figure 2) over the same time period.
Then why doesn’t what hold up?
Back in the days when I was very active with the Green Party, I spent a lot of time debating far right climate change deniers, who would point to a snowstorm and say ‘where’s your global warming now?’ Single data points are no match for controlledstudies. This whole conversation reminds me of those days.
So you’re wondering why there are so many fewer min wage jobs than one might expect at first glance?
Not at all. We simply reached the saturation point for employment (ie. there were no more people left to work for minimum wage).
I’ve just gone from 4 data points (2004-2008) to 11 (1997-2008). How many do you require?
I don’t refuse to look at statistical studies, Stephen. I refuse to spend my time googling in order to find the statistical studies that provide the evidence to support your point.
At some point, you have to do your own homework. That’s part of the burden of being a member of the Evidence-Based Community.
At some point, you have to do your own homework.
Agreed. That’s why my links go exactly to the evidence that back up my point instead of leaving you guessing about what you’re supposed to look at.
“Not at all. We simply reached the saturation point for employment (ie. there were no more people left to work for minimum wage).”
You lost me on with that one.
Suppose workers are different. They vary by some attribute, call it “skill” (or “employability”), that employers want. There is a distribution of skill, with a single peak mode, with the frequency falling each side of that mode, so only a few workers have very low or very high skill. With no minimum wage laws, we would see a distribution of wages similar to the distribution of skill.
Assume the demand curve for labour at each level of skill slopes down.
Starting with a minimum wage of $0, what happens as we slowly raise the minimum wage, holding everything else constant? In particular, what happens to the number of workers employed at the minimum wage?
There are two effects:
1. The downward slope of the labour demand curve reduces the employment of workers at each level of skill for which the minimum wage is binding.
2. The upward slope of the skill distribution increases the number of workers for whom the minimum wage is binding.
So those two effects work in opposite directions.
If we start from a very low minimum wage, which is binding for almost no workers, the second effect must initially be bigger than the first effect.
Therefore Robert’s observation, that increasing the minimum wage results in more workers employed at the minimum wage, is consistent with a model in which increases in the minimum wage reduce employment. And that is even if we hold everything else constant.
You lost me on with that one.
No doubt. One day I should brush up on my econ lingo so I’m talking your language. Anyway, if you have a pool of 10 workers and all 10 are working you’ve reached the saturation point. Regardless of the demand for more workers, no new jobs will be created from that point on simply because there are no more workers to fill them.
By 2008 we were at or very near the saturation point. The employment rate was a record high of almost 64% and during the few years prior to that bringing in temporary workers had become an issue. Therefore no more additional jobs (those in excess of the turnover rate) could be created simply because there were no more workers to fill them.
Therefore Robert’s observation, that increasing the minimum wage results in more workers employed at the minimum wage, is consistent with a model in which increases in the minimum wage reduce employment.
Except Robert’s observation was a trap designed to elicit this very response. When you look at the longer time frame (figure 3) the number of minimum wage jobs is fairly static over that 10 year time period which is not consistent with the model in which increases in the minimum wage reduce employment.
And this is the core of my argument; that the theories and models, while they may work exceptionally well in theory, fall apart in reality. There simply is no evidence to support the claim that increases in minimum wage reduce employment.
“I’ve just gone from 4 data points (2004-2008) to 11 (1997-2008). How many do you require?”
You’ve missed the point – the raw data doesn’t tell you much of anything. You need to control for all the confounding factors. It’s no different than someone arguing against anthropogenic climate change by posting temperatures from 11 different dates. Even if they did provide links from the Weather Network.
Will someone please just ask RM why, if minimum wage hikes have no effect on unemployment, we don’t just jack it up to $50/hr and make everyone rich?
Never mind, I think I just did.
Robert: You cited some data on the number of workers employed at minimum wage, and said it was evidence against the theory that an increase in minimum wages causes a reduction in employment.
I showed that even if you ignore Mike and Stephen’s point about other things changing over time your data does not support your conclusion. It is possible for an increase in the minimum wage, other things constant, to decrease total employment, but either increase or decrease the number of people employed at the minimum wage. Because there are two effects going in opposite directions.
Now you say the data is the opposite of what you originally said it was. So what? My point was that the theory that an increase in minimum wages causes a reduction in employment is consistent with that data moving in either direction.
I tried to engage you in a genuine discussion of the evidence. Now you say you were playing games with “traps”. The fact that your “trap” failed is less relevant to me than the fact you seem uninterested in a genuine discussion of the evidence.
“No doubt. One day I should brush up on my econ lingo so I’m talking your language”
Robert, I’m not an economist. I’m a software developer by training and trade. All you need to do to communicate effectively with me is make sense.
Now you say you were playing games with “traps”.
Yes, because there’s one thing I’ve learned you have to do when having a discussion with an economist; drag out every one of their canards and beat them silly. Until that is done the discussion cannot progress. That was one canard and I still have to drag the phantom job losses canard (ie. without the minimum wage increase we’re making a random guess that there would have been more jobs created) out of the closet.
It is possible for an increase in the minimum wage, other things constant, to decrease total employment, but either increase or decrease the number of people employed at the minimum wage. Because there are two effects going in opposite directions.
Am I reading this right. If the number of minimum wage jobs increase that is consistent with your theory and if the number of minimum jobs decrease that is also consistent with your theory? No wonder economists believe this nonsense. They’ve convinced themselves that all the evidence supports their theory.
Will someone please just ask RM why, if minimum wage hikes have no effect on unemployment, we don’t just jack it up to $50/hr and make everyone rich?
Because we don’t live in Sillyland.
the raw data doesn’t tell you much of anything. You need to control for all the confounding factors.
Only as it pertains to a theoretical discussion. When you’re looking at reality however, all factors add up to paint an accurate portrait of what is really happening. And the accurate portrait of what is happening is no job losses. In reality job losses only occur whenever we enter a period of recession. At all other times the number of jobs increase regardless of what is occurring with those confounding factors.