What to do about Canada’s labour market? Get out of the way

OttawaCitizen.com – opinion
April 30, 2013. By William Watson, Ottawa Citizen

OK, so here’s how Canada’s labour market works these days. According to a story in Tuesday’s National Post, we’ve got pub owners in Calgary so desperate for “qualified” workers they’re spending up to $2,000 each recruiting them abroad and bringing them into the country as temporary workers (which does beg the question of exactly how qualified you have to be to work in a pub). At the same time, we’ve got seasonal workers in Atlantic Canada whom we’re paying to stay chronically underemployed.

How can this be? We have a saying in Quebec, which as you know we apply to more or less everything bad that happens: “C’est la faute du fédéral!”

How should the labour market work? If pub owners are having trouble attracting workers, they should raise wages. If that hits their profits too hard, they should either raise what they charge for beer or figure out ways for staff to be more productive or both. If none of that works, they should get out of business: The cost of the service they’re trying to provide is greater than what people are willing to pay for it. They should try something else.

At the other end of the country, if people are working in jobs that don’t pay enough to provide what they regard as a decent annual income, they should quit and try something else, possibly in a different part of the country. Instead, the federal government supplements their income with unemployment “insurance.” I put insurance in quotes because insurance is supposed to protect you against random acts of bad luck, such as your house burning down, for instance. But people in seasonal industries have never-ending bad luck: their house burns down year after year after year, as it were.

What’s the effect of subsidizing seasonal workers in this way? It keeps their wages artificially low. They can make a satisfactory income with not much wage income because the federal government tops it up. Back in “the day” it was called “Lotto 10/42”: work 10 weeks and get 42 on unemployment insurance. I’m never sure which day exactly people are referring to when they refer to “the day”: in this case it’s the 1970s and 1980s. The Employment Insurance rules are tighter now but they still provide a subsidy to seasonal workers. (It’s called “employment insurance” to make it more snuggly even though the contingency being insured against is unemployment. You don’t get “house-still-not-burned-down” insurance: you get fire insurance.)

Needless to say this system is very good for the owners of seasonal businesses. Because workers don’t move they get to pay lower wages than they would have to pay in an open market. When you come down to it, however, businesses that can’t cover their full costs really shouldn’t be in business.

What would be the effect of tightening the rules so seasonal workers don’t have unlimited annual access to EI? They’d have to get more work or higher wages or both in order to maintain their incomes. If their employers didn’t come through with more hours or money, many would end up moving. The resulting reduction in supply eventually would force wages up. Doubtless some seasonal businesses would fold.

How many businesses? Anyone in any way familiar with social science understands that’s impossible to say exactly — though that did not prevent the Atlantic premiers from calling on Ottawa Monday to back off on its reforms to EI until the policy could be more “evidence-based” and its exact effects predicted.

As it happens, EI is probably the most studied federal program we have. We had the Forget Commission in the 1980s. We had the Axworthy review in the 1990s. We’ve had almost countless academic studies concluding the current system subsidizes seasonal industries at the expense of non-seasonal industries. In fact, you don’t actually need much evidence to figure that out: “no-brainer-based” policies have their place, too. Moreover, the current reforms don’t go very far toward removing the subsidy. What would be much more effective, not to mention fair, would be “experience rating,” under which firms that create chronic unemployment pay higher premiums and those that don’t, don’t.

To sum up: importing temporary workers to staff Calgary pubs keeps wages in Calgary lower than they should be while paying EI to seasonal workers year after year keeps them in jobs that can never give them a decent income. The federal government should get out of both sides of this equation (as in fact, to its credit, it’s now trying to do) and let the labour market work as it should. Wages should rise in Calgary. Atlantic Canadians should move to take advantage of them.

It’s a lovely federation. A common labour market is one of its greatest attributes. We none of us have a right to a job in the province of our birth.

William Watson teaches economics at McGill University.

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