Preface

Given the significant economic and social costs of high unemployment, the creation of an environment conducive to job creation has become a priority for Canadian governments. With about 1.5 million Canadians out of work, there is no doubt that we need to take a look at how the labour market functions. Given that most economists believe that flexible labour markets are necessary for job growth, it is rather ominous to see the federal government proposing changes to the Canada Labour Code which would increase labour market rigidity.

Bill C-66, which proposes to amend the Canada Labour Code, died in the senate just before the last federal election. In spite of evidence suggesting that monopoly unions adversely affect profitability, investment, and job growth, there is some indication that Ottawa expects to re-introduce the amendments to the Canada Labour Code in the next session of parliament. The proposed amendments would shift the balance in labour relations towards unions, and make it easier for unions to organize off-site workers and introduce more inflexibility to the Canadian labour market.

This study documents the fact that one of the main causes of high unemployment in Canada is the existence of structural impediments to the smooth functioning of labour markets. It concludes that labour market regulations that promote flexibility in employment relations will, in part, help alleviate the unemployment problem.

Drawing as it does on the experience of Britain's and New Zealand's labour market reforms, the study has some important lessons for Canadian policy makers contemplating labour market changes at the federal or provincial levels of government. Careful analysis of lessons learned in other countries will point the way towards better public policy, which could reduce unemployment in Canada.

-Fazil Mihlar


Introduction

"A strong economy is the essence of a strong society. A Liberal government will put jobs and economic growth at the forefront of its objectives." -Creating Opportunity: A Liberal Plan For Canada

Canada has a systemic and worsening long term unemployment problem. Since the early 1970s, the proportion of the labour force unable to secure work has, with cyclical fluctuations, shown a steady upward trend from approximately 4 percent to rates as high as 11 and 12 percent. In the 1970s, the average unemployment rate was 6.8 percent; in the 1980s it increased to 9.5 percent; and in the 1990s it has averaged 10 percent. The most recent figures indicate that the unemployment rate has fallen slightly, but remains near the decade's average.[Statistics Canada, The Labour Force, cat. 71-001]

In a market-based economy, when the supply of labour exceeds firms' demands for it, unemployment is the outcome. There always will be a certain amount of unemployment as the labour market is in a constant state of flux; individuals leave one job in search of another, companies lay off employees, and people are continually entering or re-entering the job market. This transitional unemployment is a normal part of a dynamic economy, and is not a concern. What is a concern is why, for so many Canadians, the search for work is prolonged, or, as is too often the case, altogether unsuccessful. What factors account for the fact that Canada has one of the worst unemployment records of all OECD countries, especially relative to the United States, where the unemployment rate is below 5 percent? What, if anything, can governments do to help alleviate the high rates of joblessness?

This study addresses these questions and outlines what should be done to help reduce Canada's unemployment rate. While there is no one single cause nor one simple solution for the unemployment problem, there is a growing consensus that the most important determinant of the unemployment rate is the overall flexibility of labour markets. [For example, see OECD, The OECD Jobs Study: Evidence and Explanations Part II-The Adjustment Potential of the Labour Market, 1994; OECD Economic Surveys: Canada, 1994-1995 and 1995-1996] Rigidities in the labour market stop wages from adjusting appropriately across different sectors of the economy. If governments are interested in reducing the unemployment rate, the evidence indicates that the most effective action would be to enact policies that promote labour market flexibility. The proposed amendments to the Canada Labour Code Part I include a partial ban on the use of replacement workers, and obliging employers to provide the names and addresses of off-site workers as well as access to any electronic communications that the firm may have to assist unions in the drive to certify these workers. These changes are in sharp contrast to necessary liberalizing policies and will increase rather than reduce unemployment. Why would a government concerned about the high level of unemployment adopt labour code revisions which would have the effect of increasing unemployment? One potential explanation is that the government has focused on other plausible causes of unemployment such as insufficient economic activity, payroll taxes, technological advances, or government cutbacks.

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.