November 2001
Wage Moderation Creates Jobs & Growth
by Fred McMahon
Wages and taxes—both direct and indirect—are the two biggest costs most businesses face, typically much larger over the long term than the cost of capital.
These costs determine whether a business remains healthy and makes good profits, or goes bankrupt, or goes elsewhere where labour and government are less costly. Profits are also the means and the incentive for further investment, and that creates prosperity and jobs for all of us. Strong profits are the difference between a healthy growing economy, which generates work for everyone including young people entering the labour market, and a sluggish economy where many suffer poverty or unemployment.
Unfortunately, too many Canadian governments and unions fail to recognize this simple fact. Canada has continually fallen behind the United States in providing opportunities and prosperity for its people, largely because labour and government have inflated the costs of doing business in Canada.
But it doesn’t have to be this way. Fifteen years ago in Ireland, times were bad—even for Ireland, a nation that was better at exporting its people than its products. At that time, in the mid-1980s, Ireland’s unemployment rate was about twice that of Canada’s while Canada’s per capita GDP was two and a half times that of Ireland. Today, Ireland’s unemployment rate is about half that of Canada’s while its per capita GDP is about 20 percent larger than Canada’s.
"We had declining economic growth and declining employment [in the 1980s]," Manus O’Riordan, head of research for Ireland’s largest union association, the Services Industrial Professional Union, told me while I was in Dublin on a research visit a couple of years ago. "Wages were up, but inflation and taxes were up more. Living standards were declining. We knew we [the unions] had to do something."
What happened? The Irish unions realized the importance of costs in the economy. Unions adopted wage moderation with the explicit goal of increasing profits to generate jobs and prosperity. They went one step further. The unions called on governments to reduce taxes so their members could take home more of the money they earned. Companies also got to keep more of the money they earned.
Overnight, Ireland was transformed from a high cost jurisdiction—plagued by labour militancy and big government— to a low cost jurisdiction with unions keen to see profits increase and government in a tax-cutting mode. The unions recognized one more thing. "Taxes are a disincentive to work," O’Riordan told me. "We need incentives to work."
The Irish miracle had begun. Canada would soon be left behind by the "have-not" nation of northern Europe. The increase in profits powered new investment, and that meant Irish workers became ever more productive, leading to a continuing stream of wage increases, but ones never so large as to squeeze off future profits and future growth. Just as wage moderation led to once unimaginable wage increases, Irish tax cuts led to great increases in government revenues as economic growth took hold.
Opportunities are everywhere in Ireland, particularly for the young. Ireland no longer has a shortage of jobs. It has a shortage of workers.
Back in the 1980s at the same time Ireland was suffering its economic woes, the once prosperous Netherlands was losing economic ground due to militant unions and ever-growing government. Then Dutch unions and the Dutch government, like the Irish, realized the importance of costs and profits.
"We [the union movement] didn’t immediately accept the relation between wages and job creation," I was told by Cor Inja, chief labour economist for the FNV, the largest federation of unions in the Netherlands. "But, you know, enterprises can’t operate without a profit, and we saw big enterprises had to close their doors without a profit. We had to bring back the total number of people working. We learned [the relation between wages and profits] at a fairly late stage of the development. In the ’70s, unemployment started to rise, and we [did not act] until early in 1982.”
Canadian unions seem far from receiving this epiphany. In fact, the word Canadian union leaders most often seem to use in conjunction with "profits" is "obscene." This attitude has spelled the downfall of many unions. Businesses with militant unions tend to get smaller or disappear. As Jock Finlayson notes elsewhere in this issue, the percentage of unionized workers in the private sector has continued to shrink in British Columbia—a statement true for the rest of Canada as well, though a number of economic changes, along with union militancy, are responsible for this.
The government sector in Canada remains union-dominated, and the signs are that public-sector union militancy is building, not decreasing. High union wages in the public sector force the government either to cut back on services or increase taxes. All Canadian workers are forced to pay unnecessarily high taxes, or receive inferior services to subsidize militant government workers. So where Irish unions worked to moderate taxes and wages—with huge benefits for Irish workers—Canadian unions stick to their militancy and, in the public sector, stick it to the taxpayer.
A case in point is the recent public transit strike in Vancouver. The strike wore on not over pay issues—Vancouver’s bus drivers, by most calculations, were already the best paid in Canada—but over the issues of contracting out and part-time workers. The union opposed both, not to benefit its members, but to maintain its power.
This inflexibility creates a number of extra costs on top of already skyhigh pay levels. Those costs reduce the transit services Vancouverites are offered, despite a large subsidy from taxpayers. So everyone pays extra taxes for public transit, while those who rely on public transit (often the less well off, the handicapped and the elderly) suffer from poor service. This story is repeated in any number of public sectors, notably the health care sector (see Nadeem Esmail’s and Peter Holle’s articles elsewhere in this issue), and for government as a whole.
If Canada is to move ahead again, and start generating wealth and opportunities for all its people, it needs more labour market flexibility. Specifically, this means giving workers, business, and government the ability to react to changed circumstances and new opportunities at pay levels appropriate to those circumstances, without having to fight every change in work rules and unreasonable wage demands at every turn.
In his article, Finlayson discusses the labour market reforms undertaken by the British Columbia government. But further reaching reforms should also be considered, such as giving employers the right to hire replacement workers during a strike. Currently, bargaining power is unbalanced. In a strike situation, employers can face the choice of going out of business today or surrendering to union demands, which might well put them out of business tomorrow.
Right-to-work legislation, giving individual workers the fundamental right of deciding whether they wish to belong to a union and contribute to it, should also be considered. Canadian workers are now forced to contribute to workplace unions no matter how much they might oppose what the union is doing.
Government should use the market to provide services through contracting out wherever possible. More and more governments are realizing the benefits this produces for their people. For example, Stockholm in socialist Sweden contracts out its public transit services. That’s resulted in better service, higher efficiency, and lower costs (Ministry of Economic Affairs, p. 223).
Contracting out adds to labour market flexibility, whether the contracts are with unionized or non-unionized shops. Unions are restrained from making outrageous, inflexible demands that ignore economic realities if their employer might lose the next contract because of high costs.
That brings us to the problem of public sector bargaining. The government can’t go out of business, no matter how militant or unreasonable a government union is. The balance of power between unions and economic reality is overturned. Government should revoke the right to strike in any area where government has a monopoly. Wages should be set to be comparable to wages for similar work in the private sector.
Canada has been falling behind its economic potential, as is shown by comparisons not just with the United States, but also with Ireland, the Netherlands, and many other nations. To catch up to our potential, we must create labour markets that work, not ones that, either through union militancy or high taxes, create unnecessary, troublesome burdens for all Canadians.
References
McMahon, Fred (2000). Road to Growth: How
Lagging Economies Become Prosperous.
Halifax: Atlantic Institute for Market Studies.
Ministry of Economic Affairs, Netherlands
(1997). Benchmarking the Netherlands:
Prepared for the Future? The Hague: The
Ministry of Economic Affairs.
Fred McMahon (fredm@fraserinstitute.ca) is Director of the Social Affairs Centre at The Fraser Institute. Formerly with the Atlantic Institute for Market Studies, his most recent book is Retreat from Growth: Atlantic Canada and the Negative Sum Economy.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.