The Fraser Instituteâ€™s Job-Creation Strategy: Cut Wages
The Fraser Instituteâ€™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 Instituteâ€™s contradictory media spin in different provinces reflects this lack of evidence.
The Instituteâ€™s press release quotes the studyâ€™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 Instituteâ€™s credo is “if it matters, measure it.” Apparently, wages donâ€™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 evenÂ prove that these variables reduce quantity.
Its press release emphasizes western Canadaâ€™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 Saskatchewanâ€™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. BCâ€™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 employmentÂ 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.Â (Of course, broader provincial economic policies could influence job-creation.)
A comparison of media reports also reveals the lack of connection between the Fraser Instituteâ€™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 Instituteâ€™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 thereâ€™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
“Itâ€™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.