Racing to the Middle: Minimum Wage Setting and Standards of Fairness

Abstract

We examine the setting of minimum wages, arguing that they can best be understood as a reflection of voters' notions of fairness. We pursue this idea by setting out a theoretical model of minimum wage setting in a federation. The key model implications are that minimum wages should track movements in the unskilled wage distribution and movements in minimum wages set in other provinces. The model also has the implication that governments will tend to "race to the middle" of the provincial minimum wage distribution in an attempt not to appear to be unfair. We examine these implications using two types of evidence: interviews with policy makers; and econometric evidence based on minimum wage data from the ten Canadian provinces from 1969 to 2005. Both forms of evidence are strongly supportive of the model. The estimation also indicates a lack of support for models based on the political power of competing, self-interested groups or on the idea that minimum wages are set to meet redistributional goals.

Keywords: minimum wages, interjurisdictional interactions, fairness

JEL Classification: H73, J38, Z13