November 2001
The Bumpy Path to Labour Market Reform?
by Nadeem Esmail
Market-based economic reform is a complex and studied process, with very specific targets and goals. Assuming that the optimum size of government has not been reached, tax rates need cutting, governments need down-sizing, and regulations need to be reduced. One of those regulatory reforms, specifically one that has played a large role in all successful reform packages, is in the labour market. Labour market reforms have often been recognized as one of the most significant contributing factors in economic growth.
Internationally, labour market reforms have helped countries like Ireland and the Netherlands turn their slowing economies from bust to boom when implemented along with reductions in the size of government and taxes. These initiatives have also been very successful at the regional level, as Alberta and Ontario have discovered.
British Columbia is the latest province to jump on the reform wagon. Having experienced negative net capital growth over the last decade (capital accumula-tion after depreciation) (Clemens and Emes, p. 24) and suffered from per capita GDP growth well below the national average and far behind that of Alberta or Ontario in the last five years (Clemens and Emes, p. 17), BC has fallen into a precarious position where reforms are far more necessary than ever before.
The new Liberal government has started along the path to reform with both the creation of the Core Services Commission— which was devel-oped to determine where reductions in government size could occur—and a significant tax rate decrease to help boost investment. Unfortunately, the government has only made partial inroads into labour market and regulatory reform; it has even created new regulations for labour that are counterproductive.
Early on, the Liberal government made numerous changes to its own internal labour relations rules which led to far more flexibility in government labour relations (see Jock Finlayson’s article following this one). Some of the high- lights included the abolition of fixed wage rules for government contracts (which had previously restricted all government contractors to pay union wages to contract employees), and a number of changes made to public service reward systems (which added merit rather than just seniority to the qualifications for promotion). These changes sent a positive signal to investors coming into BC about the government’s commitment to a more flexible labour regime in the public sector. Unfortunately, none of these changes do much to address needed changes in the private sector labour market. The only change for that sector so far is the adverse affect of an increase in the minimum wage.
Flexible or relatively unregulated labour markets increase profitability by allowing companies to hire the labour they need, skilled or unskilled, at wages that reflect the skill level and value of each job. Put another way, workers can be paid according to their productivity or output value. Together, the firm and the job applicants determine that value based on negotiation, skill levels, and economic conditions.
Companies need to have flexibility; they need to be able to renegotiate wages in the event of a downturn and adjust their labour structure to survive intact. Regulations can also make restructuring a slower and more difficult process, which, in turn, may cost the company large amounts of money. The bottom line is that investors need a labour market that is willing to meet their needs, not a high-cost market to which they must conform.
This does not appear to be the goal in British Columbia. Legislation passed by the previous government, honoured by the current one, has pushed the minimum wage up to $8.00 per hour, compared to $5.90 per hour in neighbouring Alberta and $6.85 per hour in booming Ontario. Relatively high minimum wages not only prevent young people and less skilled labourers from finding employment, they can effectively deter investors from setting up companies in the BC market for fears of excessively high support staff costs, and wage inflexibility in the event of a recession. Increases in minimum wages demonstrate the problem a little more clearly. Since 1992, Alberta has increased the minimum wage only $0.90 per hour compared to an increase of $2.50 per hour in BC. A large part of the increase in British Columbia since 1992—16 percent, in fact—can be attributed to changes made this year alone that have added $0.40 to that total.
Minimum wage regulations only tell part of the story though. The problem is that changes are not coming fast enough on private sector regulations. The Liberal government has not altered the private enterprise legislation that entitles employees to governmentally-determined absences, leaves and pre-determined holidays with pay from their first day on the job. Other provinces have minimum employment periods prior to employees receiving these benefits which reduces the burden on an employer who wants to hire an employee or attempt to restructure. Recent deliberations about pay equity legislation and the approved hike in the minimum wage are sending the opposite signal to private business, suggesting that the new government may not be as committed to a burgeoning private economy as once hoped.
A flexible labour market in BC is not impossible, nor is it difficult to create from an economic perspective. Simple changes like eliminating, or at least significantly reducing minimum wages, enacting right-to-work legislation that would entitle workers to employment without forced union membership, and a careful cost-benefit analysis of all labour regulations would be significant steps forward. Each of these steps would greatly reduce the regulatory costs on business and promote investment in BC as well as clear up some of the confusing signals the government is sending.
The BC government has come a long way in half a year, but is still far from where it needs to be. The provincial government is still too large, taxes are still too high, and regulations that require modification are not being changed. Labour market regulations today are constrictive and confusing; they are sending conflicting signals to investors, which is pushing them away to less regulated regions like Alberta, Ontario, and the US. The provincial government needs to examine the labour market and the regulation of it soon, before the reforms initiated thus far produce smaller results than intended, and the public loses its appetite for change.
Reference
Clemens, Jason and Joel Emes (2001).
Returning British Columbia to Prosperity.
Public Policy Sources number 47. Vancouver:
The Fraser Institute.
Nadeem Esmail (nadeeme@fraserinstitute.ca) completed his B.A. in Economics at the University of Calgary, and his Masters in Economics at the University of British Columbia. He is Health Policy Analyst at The Fraser Institute.
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