The Fraser Institute’s Job-Creation Strategy: Cut Wages

The Fraser Institute’s latest study of North American labour markets intends to demonstrate that public-sector employment, minimum wages, unionization, and labour laws that facilitate collective bargaining damage labour-market performance. However, its “Index of Labour Market Performance” measures the quantity of jobs with almost no regard for quality. Even this questionable index is not negatively correlated with the policies criticized by the study. The Institute’s contradictory media spin in different provinces reflects this lack of evidence.

The Institute’s press release quotes the study’s author, Niels Veldhuis, as saying, “The ultimate goal of a well-functioning labour market is higher wages for workers, more employment opportunities, lower unemployment and higher levels of productivity.” Despite this eminently reasonable statement, his “Index of Labour Market Performance” oddly omits any measure of wages.

The Index averages scores for five variables: total employment growth, private-sector employment growth, unemployment rate, duration of unemployment, and GDP per worker. The first four clearly measure the number of jobs rather than the quality of those jobs. The fifth variable encompasses three main factors. First, relative price levels affect GDP in ways that partly filter down to the labour market. Second, this ratio reflects the number of hours worked by each employee, which again is about employment quantity as opposed to quality. Third, it reflects labour productivity (output per hour), which employees can translate into higher wages given sufficient bargaining power.

At least 80% of the Index simply measures raw numbers of jobs. The rest measures potential wages as opposed to actual wages. Imagine that, within a given GDP, wages were cut in half but employment increased by one-tenth. The Index would show a significant increase in “Labour Market Performance” but almost all workers would, in fact, be worse off. The Fraser Institute’s credo is “if it matters, measure it.” Apparently, wages don’t matter.

Even if public-sector employment, minimum wages, unionization, and certain labour laws reduce the number of jobs created, these variables could still raise the wages paid by those jobs and improve job quality in other ways. In addition to ignoring quality, the Fraser Institute does not even prove that these variables reduce quantity.

Its press release emphasizes western Canada’s strong “Labour Market Performance”. However, of the four western provinces, only Alberta embodied the policy prescriptions of low government employment, a low minimum wage, a low unionization rate and pro-employer labour laws. Compared to Ontario between 2002 and 2006, Manitoba, Saskatchewan and BC had high public-sector employment, high minimum wages, high unionization rates and progressive labour laws. (I suspect that Saskatchewan’s minimum wage appears slightly lower relative to per-capita GDP partly because rising commodity prices drove up its per-capita GDP.)

Saskatchewan scored the “worst” in all of North America based on these policies, but its “Labour Market Performance” was the second-best in Canada. BC’s policies ranked twelve- “worst” among the sixty North American jurisdictions, but its labour-market performance was the third best in Canada. Manitoba had the third- “worst” policies on the continent and the fourth-best performance in the country.

One might conclude that western Canada did relatively well because of its relatively high public-sector employment, minimum wages, unionization and labour standards, with Alberta being the exception. A more reasonable analysis is that employment grew rapidly in western Canada due to rising commodity prices and related factors that increased demand for labour. Provincial labour-market policies have very little effect on the number of jobs created, but can influence the quality of those jobs. (Of course, broader provincial economic policies could influence job-creation.)

A comparison of media reports also reveals the lack of connection between the Fraser Institute’s policy prescriptions and its measure of labour-market performance. When speaking to national reporters and Alberta reporters, Veldhuis seemed to trumpet all of western Canada as vindicating the Fraser Institute’s prescriptions:

“Workers in western Canada are enjoying the benefits of a healthy labour market, an indication of their strong economies” – National Post

“I think there’s a misperception, certainly in Eastern Canada, that the West is enjoying the boom solely because of commodities . . . But a major thing has been provincial governments getting things right in terms of policy” – Calgary Sun

“It’s been sort of a harmonized movement in the West toward smarter policies” – Calgary Herald

When speaking to Saskatchewan and BC reporters, he criticized these two western provinces for not implementing what he considers to be smart policies and downplayed their strong labour-market performance:

. . . the Fraser Institute also expressed concern about “pro-union labour laws” in Saskatchewan, about “high public-sector employment,” and about “relatively high minimum wages.” While Saskatchewan was ranked second on the Fraser Institute study, Veldhuis said that is second place “with a large asterisk.” – Regina Leader-Post

But when it comes to labour market characteristics – such as the number of people employed in the public sector, the amount of unionization, minimum wage levels, and labour laws – British Columbia lags both Alberta and the U.S. “If we actually improved the characteristics of labour markets we would be among the top performing labour markets in North America” – Vancouver Sun

The Fraser Institute is obviously entitled to its opinions about labour-market policy. However, these opinions do not naturally flow from some objective, coherent assessment of labour-market performance.

As an aside, the study is inconsistent about why minimum wages should be lower. It begins by arguing, “High minimum wages reduce employment opportunities for young and unskilled workers.” It then claims, “the increase in the minimum wage induces teenage workers to leave school in search of employment.” This second point presumes that higher minimum wages improve employment opportunities for young workers. Finally, the study contends that we should not worry about employment opportunities for young workers because some live in high-income households.

Veldhuis and I will appear on CFRA radio tomorrow (Labour Day) morning just after 8:00 a.m. EST.

4 comments

  • http://www.fraserinstitute.ca/admin/books/files/Measuring%20labour%20markets.pdf

    What the Fraser Institute fails to consider is the workers money available for discretionary spending. In other words how much money people have left over after life necessities, such as food, basic housing, essential transportation, essential clothing, essential telecommunications, medical expenses, education expenses and taxes. It doesn’t mater how much money you make if you have nothing left to buy the extras you want, such as a TV, games, holidays, toys, entertainment and etc. Some more affluent people may wish to spending their discretionary money on non-essential medical or education, luxury car, luxury housing, expensive restaurant meals.

    Wages can be lowered while discretionary spending increases, if the cost of necessities decreases through greater efficiencies. Great efficiencies in food production are achieved through the competitive farming industry. Retail is currently very competitive due to ready access to quick convenience comparison shopping through the internet. This keeps many essentials goods, clothing, personal hygiene, etc at cost effective prices.

    Greater housing efficiencies can be achieved through less speculation cost in the housing market, greater land usage efficiency, and preferential construction of basic housing upgradable to luxury by the purchaser. Land usage rather than property value taxes are fairer and take into consideration the social cost and benefits of various types of land usage. Also land usage taxes prevent speculators from holding property within 0.5km of a transit terminal, station as low rise or other low value property. Zone density based on building density rather than building height far better reflects people’s needs for privacy and green space for relaxation. Public housing corporations should build unfinished units, near transit with, but with finished public space, such as lobby, park, etc. This allows a low income family or wealthy family to live in the same complex. The wealthy family finishes their unit in luxury, while the low income family does not.

    Through the reduction of land speculation cost, the cost of redevelopment is also reduced. The reduced cost of redevelopment enables higher density construction near transit, with the effect of increasing access to transit and reducing transportation cost. Also ready access to transit allows students who cannot drive the ability to choose from a number of schools. This competition for school openings through exam or competition scores, ensures cost effective quality education. Quality education provides industry a ready supply of required skilled workers.

    Higher density housing does result in lower telecommunications home wiring cost, but there is much room for improvement beyond this. Third party bandwidth or content providers can sell data bandwidth, such as optical fibre, transmission tower access or media content to telecommunication companies providing access to user services. Vertical integration of telecommunication companies providing access to user services into data bandwidth in particular transmission towers prevents other companies entering the market place. Vertically integrated telecommunication companies gain a greater return by preventing further competition than they do from improving cost efficiency of their services provided.

    Denying essential medical and education service to those who cannot afford results in greatly increase living cost and a shortage of skilled labour. By denying essential medical service causes families to suffer through loss of employment or reduced opportunities. This is particularly costly when opportunities of young people are reduced. For these reason basic medical and education services should be provided universally. People should be given the opportunity to upgrading their hospital rooms and other optional services.

    Workers in countries with high cost of living due inefficiencies require higher wages, which in turn results in higher manufacturing cost. Over time manufacturing industry will relocate to achieve most the cost effective manufacturing. This move is not intimidate because of the high capital cost in manufacturing and time required to construct related transportation and infrastructure. Also non-manufacturing resource based industries cannot relocate, ill regardless of high wage cost, or other high cost. If the only industry that remains in a country is resource based then the country is not competitive just resource blessed. High wages also may be a result of lack of available workers, due to inadequate education, dangerous employment or living environment, and low prestige putting families at a disadvantage.

  • there was an interesting release on Monday from CPRN by Graham Lowe that looks into the notion of Job Quality. It covers the topic quite well.

    It’s called 21st Century Job Quality: Achieving What Canadians Want.

    See here for an e-copy.

    http://www.cprn.org/documents/48485_EN.pdf

    I have mentioned several times on this forum that one small step forward on the job quality front is through the creation of some new measure of jobs and quality from a progressive perspective. Potentially that is somewhat of a tall order. However there are some macro measures that are contained within the currrent LFS survey program that are not published regularly that could effectively cover off some of what Mr. Lowe is recommending with this report. Mind you it might be somewhat of a slash and burn way to get through the forest, but at least it may be a step in the right direction. I am quite glad he has moved the issue forward.

    Pt.

  • “The ultimate goal of a well-functioning labour market is higher wages for workers, more employment opportunities, lower unemployment and higher levels of productivity.”

    Wow.

    Do they actually believe their own stuff?

  • I nosed around the Fraser Institute’s website after reading news of their annual mining survey. I was looking for a definition of “environment” and “native land claims” in their rating methodology. After not finding any, I can safely assume Provinces and nations that allow pollution and walk over legal land claim negotiations in progress, will be ranked higher.
    This annual mining survey is fine from the point of view of jurisdictional mining industry profitability, but is being broadcast as if being ranked highly is a mark of virtue. At best, being ranked high by the Fraser Institute is good for local employment and corporate tax revenue and bad for preservation of environmental capital base and property rights.

    Then I nosed around their website further and saw repeated references to the uncertain science surrounding global warming and the impending need to privatize freshwater resources. Perhaps such arguments would have their place in Venezuala, Russia (until arrest) or parts of Europe, but in Canada the prime economic threat is that we are trending towards the neoconservative economic thinking of the United Sates. Here, at least since the 1980’s, the economic damage of going too far to the left is far less than trending towards letting big oil and the presently non-existent military-industrial complex, run the show.

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