Minimum Wage in BC

Source: http://www.motherjones.com/

With all the discussion around minimum wage - particularly the push for a $15 minimum wage. I was recently asked my opinions on the matter. 

Although I have many, which are two-sided and highly contingent on our basic assumptions of market structure in hiring minimum wage employees, the point here is not to make a bunch of normative statements. 

From my readings, much of the literature seems to be split on minimum wage, for every study I have read which supports raising minimum wage due to some list of net benefits, there is another study which is against minimum wage for some list of net costs. 

Rather here. I wanted to briefly evaluate the minimum wage condition here in BC. 

the following utilizes minimum wage data over the last 20 years which I obtained from here and utilizing the all-items Consumer Price Index for both BC and Canada from here. 

using these data sets I created two plots.

first, in BC minimum wage is not indexed to inflation, as a result, it is set intermittently based on the political pressure of the time. 

thus the first plot (below) shows the nominal minimum wage compared to what the minimum wage would have been if it had been indexed to inflation. Here I have indexed it to both the Canadian inflation rate as well as the BC inflation rate for comparison. 

What we witness is that in relation to 1997, the minimum wage today is higher than it would have been if the minimum wage had been inflation adjusted. Keep in mind this was definitely not true between 2005 and 2012. 

The next plot (below) demonstrates the real minimum wage (in 2017) dollars over the last 20 years. Again this real wage is constructed using both Canadian and BC CPI data, then compared to the nominal. 

Nothing too surprising from this graph, most the intuition could have been pulled out of the previous by comparing an inflation-adjusted wage to the true wage. But what we witness is a reinforcement of our previous statement that minimum wage in real terms is higher today than it was 20 years ago. 

Due to the nearly 10 years of constant wage at $8.00/hr we see the outcome that between roughly 2003 and 2012 the real minimum wage was lower than it was in 1997. That is those individuals earning minimum wage saw a steady erosion of their purchasing power over this almost 10 year period due to inflationary pressures. It took nearly 2 years of increasing minimum wage, from about 2010 to 2012 for the real minimum wage to match its 1997 level before continuing to increase. 

Keep in mind this is strictly observational - there are no statements being made that 1997 was the proper minimum wage, which subsequently saw years of erosion. Nor is today's minimum wage necessarily a correct minimum wage either. 

Depending on our assumptions of labour markets minimum wage can either help correct a market failure (in the case of monopsony or oligopsony) or in any other case minimum wage will cause a market failure. 

Final note, because all around we are seeing a big push for $15/hr minimum wage. My big response to this is what makes $15/hr so special? based on the market situation, perhaps no-minimum wage might be optimal, perhaps $16.26 might be optimal. 

The takeaway is that, as far as I can tell, there is nothing special or optimal about a $15/hr minimum wage, rather it is a convenient, round, rally cry - where $14.12/hr just does not have the same ring to it. 

What are your thoughts? feel free to comment below. 

Almost Half of Canadian mortgages up for renewal next year.

Bank of Canada has recently released a report on Canada's financial system and the risks presented to it. the full report can be found here.

Although there was a lot of interesting insight into the Canadian mortgage and debt situation of Canadians, the part which really stuck out to me was that 47% of Canadians are set to renew their mortgages within the next year. Expanding this out, 78% of Canadians will be renewing sometime between now and 2020.

On this there has been a lot of talk of the renewal shock, shouldn't be a surprise that interest rates have been creeping up over the last year. Thus at first glance, I bought the whole renewal shock argument.

I then started thinking back to about 5 years ago when I was underwriting 5 year fixed rate mortgages typically at about 2.99%. Fast forward to today and the local bank is advertising 5 year fixed rates of 2.84%, jumping on to "ratehub.ca" shows an even lower 5 year fixed rate of 2.69% currently.

Although I don't recall giving out many rates lower than 2.99% looking back at ratehub.ca - it appears that during the spring early summer of 2013 rates fell to a low of 2.64% before rising to a high of 3.68% (I do remember when this spike happened).

The end result is that through most of 2013 rates were on par or higher than rates are today. Taking a ceteris paribus approach that today's 5-year fixed rate will more or less stay constant through 2018 means that the 47% of Canadians renewing this year will be renewing at a similar if not lower rate than their current mortgage contract.

It is not until about the end of 2014, early 2015 that the 5-year rate dipped below current rates. That is if rates were just to stay constant, those renewing in 2019 and 2020 will likely see a higher rate on their renewal than they had on their previous contract. likely this will not be a problem though as these families have also likely seen their incomes grow over this time period.

All this to say, Although it is interesting that we have such a huge bulk of mortgages entering renewal in the next year, it may be much ado about nothing. likely many of these households will be renewing at contract rates similar to their previous, and thus unlikely to see a payment shock.

The potential problem that may arise - often renewals provided the financial institution with the time to re-visit clients finances, allowing the opportunity to up and cross-sell products or consolidate debt into the mortgage (push a 20-year term back out to 25 for example).

While the new rules coming into effect are not going to affect renewals - they will end up affecting any mortgage which is re-written. this means it will greatly inhibit the financial institution's ability to rework clients debt, or for clients to consolidate larger consumer debt into their house.

What are your thoughts on this report?

Is it that this massive 47% of mortgages coming up for renewal over the year is a cause for concern or just business as usual?

Feel free to comment below.