N.B. wages are low, but labour costs are high | JDI Roundtable | UNB

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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

N.B. wages are low, but labour costs are high

Herb Emery

When I moved to New Brunswick two years ago, my reaction to reported labour shortages in a slumping economy was as dismissive as the one I had for the same reports in Alberta and Saskatchewan when they were booming.

From my perspective as an economist, labour shortages shouldn’t be lasting problems for any economy since wages should increase to eliminate them. So my response was simply, just tell employers to raise wages. It took moving here and actually talking to employers to understand why I was wrong.

In a competitive labour market, the wage paid to a worker reflects the productivity of the worker - the value of a what a worker produces in an hour of work. If the demand for labour increased because the value of what a worker produces increases, then wages should increase. That increase in pay induces an increase in labour supply.

Work I have done in the past demonstrates that Canadian provincial labour markets are integrated and competitive and given the adjustment of wages across provinces, there were not reasons to believe that there were serious labour shortages in any Canadian provinces. In my published work I was not sympathetic to complaints of business groups or employers since it seemed like they were creating a “fake crisis” to push for tax cuts or other unwarranted gains in profit.  

While my estimates and calculations were correct, my interpretation of them missed something important.

When wages increased because labour productivity was increasing, the inducement of more workers into the market was only part of what was happening. The other piece is that workers were able to gain from the short-term scarcity of labour and achieve wage gains through keeping a larger share of the value of what they produced.  Counter to the claims of many progressive politicians and labour groups, workers were sharing in the pre-2008 recession growth and more problematically for the non-energy economies after 2008, workers continued to have wage growth even when labour productivity stopped growing.  

Statistics Canada data on labour productivity and labour compensation shows that in 2001, total compensation (wage and benefits) for an hour of work in Canada overall and in New Brunswick was about 50 per cent of the value of the GDP produced with that hour of work. 

The competitiveness of New Brunswick improved relative to the Canadian average according to this “unit labour cost” measure until the 2008 financial crisis - relative to the value of what a New Brunswick worker produced, the total compensation paid to the worker was lower than for the rest of Canada and much lower than in Nova Scotia.

After 2008, labour productivity and total employment in New Brunswick stopped growing coincident with the decline in private sector investment. Wages continued to rise slowly but steadily, resulting in labour costs taking a larger share of an employer’s revenues. In 2017, total compensation paid for an hour of work in New Brunswick has reached 70 per cent of the value of GDP produced by that hour of work.  

This is 5 per cent higher than the average for Canada and on par with the perpetually high labour cost Nova Scotia. This is where you see the evidence of labour shortages as the affordability of labour has declined due to its scarcity. And as the share of GDP going to labour increased, the return to investment in New Brunswick was falling.

So New Brunswick has labour shortages and the symptom for them has not been a sharp increase in wages, but a sharp increase in wages as a share of the value of what the worker produces.

Given the high share of a firm’s revenues that go to payroll in New Brunswick, employers don’t have much of a margin to raise wages to attract labour, or invest in capital and machinery to allow them to substitute for labour and increase GDP.  

Payroll rebates and other incentives for investment attraction are one way to offset this disadvantage of New Brunswick for investors, but unless this results in labour productivity growth, these rebates are not a long-term solution for getting the economy back on track.

The stagnation of labour productivity combined with wage increases unrelated to worker productivity has created a problematic situation. New Brunswick workers continue to have some of the lowest average wages in Canada but given their lower level of productivity, they are a high cost source of labour.  

This has been undermining the competitiveness of the province’s producers and has likely been discouraging the investment we need to get the economy growing.

Where many in our province remain confused why WorkSafeNB payroll tax increases, or new Family Day holidays, or even minimum wage hikes are such a challenge for employers in New Brunswick given the low wages paid, the cost of labour compared to labour productivity highlights how unaffordable these changes in compensation and benefit coverage for workers are in the absence of some other business cost relief.

Thirty years ago, Premier Frank McKenna identified the low wages of New Brunswickers and an abundant bilingual workforce as important for attracting call centres to the province.

New Brunswick’s low wages compared to other provinces persists to today but labour is not so abundant as the total size of the labour force is falling, particularly young workers who have traditionally been the supply of low-wage labour.  And, despite workers being paid low wages, New Brunswick workers are not providing the value proposition for employers that they did in the past.

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – Oct. 24, 2018