The Broadbent Blog


Why Canada needs a conversation about fair wages

fair_wages.jpg

To mark the launch of ‘Inequality and the Fading of Redistributive Politics’, a seminal new edited volume on inequality in Canada, the Broadbent Institute is featuring a series of posts from the book’s contributors. Today, we present a piece from economist and Broadbent Fellow David Green.

In the mid-1990s, Canada went through a policy paradigm shift, one that had far-reaching implications for the employment opportunities and wages of Canadian workers.

A prolonged period of low employment rates and stagnant real wages had raised fears that Canada was in danger of falling into the sclerotic patterns of Europe instead of the dynamic patterns of the US.

The fact that the US was leading the world in employment and wages resonated, Canada being particularly prone to looking south to our neighbour for comparison. The policy response in both federal and provincial governments was to adopt the outlook of the OECD’s Jobs Strategy: labour markets must be made flexible (as the US market was perceived to be) or the outcome would be dire.

The antidote was to reform transfer policies, making both Social Assistance and Unemployment Insurance harder to access and more linked to skills development; to cut taxes; and to try to reform the role of institutions like unions and worker legal protections that were perceived as calcifying the economic engine.

Many developed nations took on this same approach but in some ways Canada was the poster-boy.

We can look at the policy shift in the mid-90s as a sort of grand bargain with labour (though, importantly, one that was never formally proposed or accepted): the social safety net and worker protections would be weakened but, in return, a better functioning economy would generate more jobs and better wages. As we approach another federal budget, it is useful to ask two questions: is Ottawa still following the “flexibility” paradigm? And has that paradigm delivered on its side of the bargain?
 
To answer the first question, the Harper government not only continues to believe in the flexibility paradigm — they have taken it to a whole new level. This government seems paranoid that wage increases could choke off economic growth. How else can one explain their interventions into wage bargaining, in some cases even after the firm and the workers had reached a deal? How else can one explain bringing in Temporary Foreign Workers (TFW) that can be paid a lower wage to fill jobs at coffee shops?

The TFW program in particular reveals a government obsessed with keeping wages low and reveals what I view as a fundamental misunderstanding of how labour markets work. Increased demand for labour in the West has resulted in substantial wage increases for all kinds of workers. Those increased wages send signals to workers in other parts of Canada and to young people deciding what skills to invest in about where there is demand. The increased wages may slow down development in parts of the economy that are over-heating, but it’s not clear that is a bad outcome.

Increased wages are how we share the benefits of economic growth among a wide range of people in our society. It’s hard to see the fairness in policies that seek to stamp out wage increases wherever possible.

But this raises the second question – has the policy of increased labour market flexibility worked? Has it delivered a better life for most Canadians?

The short answer is no.  To answer this more fully, we have to cut the data by region. Between 1980 and the early 2000’s the economy performed badly in terms of real wages. Real wages fell for both men and women starting a new job and whose highest education was a high school diploma or less (an education group making up about 50% of the male labour force). For males, real wages fell by nearly 20% in virtually all provinces. 

Since the mid-2000s, real wages in Ontario and the East have essentially stagnated so that workers entering new jobs are making less in real terms than their fathers did 30 years before. One could argue that the wages haven’t gotten worse since the mid-90s paradigm shift but its hard to see how the new paradigm is delivering in terms of wages in this part of the country.

In the West, and particularly Alberta, the story is different. Real wages have risen dramatically since the mid-2000s. Though, so far, that has only gotten workers back to about the real wage levels their fathers earned. It would be hard to argue that these increases are due to the policy shift. They have much more to do with global resource price movements that are beyond the influence of Canadian policy.

What about employment rates (the ratio of the number of people employed to the total working age population)? The overall employment rate did improve after the mid-1990s, eventually surpassing that in the US. But a closer look at the data reveals a more nuanced story.

The employment rate improved largely because of increases in the education level of the labour force. More importantly, the participation rate (the ratio of people looking for work or working to the population) for high school or less educated males and females of working age has dropped. For males, the drops are on the order of 10 percentage points since 1990. It’s hard to over-state the magnitude of this drop relative to anything we’ve seen before. We don’t know much about what these people are doing, but it seems clear that if the flexible labour market policy was meant to create a better jobs environment, there is a substantial set of people who have decided it hasn’t worked.

Overall, the policy package pursued by governments at both the provincial and federal levels since the mid-90s can hardly be seen as a resounding success. If the bargain on offer was that governments would reduce the amount of insurance inherent in the social safety and in return working people would get better and more secure labour market outcomes, the value of that bargain is, at the very least, questionable.

It is past time for us to have a meaningful debate about the effectiveness of this bundle of policies and ideas that continue to hold sway, and to open up a discussion about the role of fair wages in our society.  
 
David Green is a professor in the Vancouver School of Economics at UBC and a Broadbent Fellow.