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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Public policy at fault for labour shortage

Herb Emery

I have recently read a number of reports about the problem of emerging and present labour shortages in New Brunswick. Without fail, the reports identify that the reasons for the labour shortages are the aging workforce, skills mismatches of workers available and the jobs to be filled, and lagging productivity growth due to low levels of private sector investment.

Incidentally, the reports I am reading were all written before 2008. Contrary to popular belief, this isn’t a new problem.

The main takeaway from this persistent issue is that its causes are likely rooted in government policies and actions that have prevented the labour market from adjusting properly.

But first, some terms: Labour shortages are a description of a market where the wage rate is too low for labour demand to match labour supply. Labour demand describes the number of workers, or hours, that employers would like to hire at a given wage. Labour supply describes the number of workers, or hours, that are offered to employers at a given wage.

A labour shortage is a symptom that the wage rate in the market is too low. At the low wage, employers want to hire more workers than the number of workers who wish to work at that wage. 

If the labour market was well-functioning, then the wage in New Brunswick should rise as employers compete for labour. As the wage rises, more members of the population offer to work and employers should reduce the number of workers that they wish to hire at the higher wage. Labour shortages should not persist.

The Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins, recently expressed in a speech to the Toronto Region Board of Trade that the Bank is stumped as to why labour.   market “tightness,” a euphemism for labour shortage, hasn’t caused wages to in Canada to rise. She then suggested the persistent labour market tightness may be the product of 1) wages being lower than expected, as employers struggle to find candidates with the right skills; 2) cautious employees declining to trade up for higher-paying jobs with other firms; or 3) workers reluctant to move to jobs in other provinces or cities.

Deputy Governor Wilkins suggested that the lack of wage increase could reflect the falling bargaining power of workers due to workplace automation, reduced competition in some industries, and the emergence of the so-called “gig economy.”

Of course, these structural reasons for weak wage growth have been seen as remediable, with the “struggling middle class policy agenda.” This includes policies to lever profits out of employers’ iron grips with minimum wage increases, expanded Canada Pension Plan benefits, expanded Employment Insurance benefits, enhanced worker’s compensation benefits, more paid statutory holiday days and so on.

While theoretically these benefits should be seen as a form of wage for a worker, in reality most of these programs have many redistributive dimensions to them, meaning a worker is not indifferent between a wage increase and an equivalent increase in average entitlements of these programs.

It should be apparent that if labour shortages should not persist if wages rise, more attention should be paid to the impact of all things financed through employment taxes. EI premiums, WorkSafe assessments, CPP contributions and new paid holidays create a “wedge” between the total amount an employer pays for an hour of work and the wage that the employee takes home.

Who pays what share of the wedge is irrelevant to the labour shortage problem. What matters is the total amount of employer revenue that goes to wages, benefits and overall employment costs. If statutory contributions to EI, CPP and WorkSafeNB rise, then this will crowd out the amount of revenue available to increase the wage rate that employees take home.

Even uncertainty over the size of the wedge in the coming year will limit the size of wage increase that employers can offer. 

The impact of the “wedge” on wages has not been directly estimated. But economists from the University of Calgary did conduct a comparable study of the effect of corporate income taxes on average wages. Their estimates suggest that raising the provincial corporate tax rate by one percentage point would reduce hourly average wages in that province around $2 per hour.

I suspect that the increasing payroll taxes and assessments, plus paid leave and vacation entitlements added to employer payroll since 2014, are at least equivalent to this size of a corporate rate hike.

Addressing the size of the “wedge” between what employers pay and the wage portion of payment that workers take home should be a first step in addressing labour shortages in New Brunswick. Given the lack of growth in labour productivity, employers are likely paying a wage that they can afford, and so telling them to raise the wage they pay without addressing the wedge is not a solution.

On the other hand, for the same total payroll, reducing the size of the wedge could increase the wage that the worker takes home, which would stimulate more supply.

In sum, it’s time to stop blaming employers and work-ready New Brunswickers for the labour shortage situation. Government decisions over many years have been the sand in the gears, and it will be policy change that will have to fix it.

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 – Mar. 27, 2019

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.