Wright: About that worker ‘shortage’: Why are governments helping drive down wages?

Feeling a bit less of a lone voice in the wilderness as we see more critical voices of current immigration policies:

For almost 50 years Canada has done a thoroughly crappy job – to use the technical term in economics – of fostering a labour market that would provide for steady, year-over-year increases in real pay for working Canadians. I calculate that in 1976 it would have taken a worker earning the median employment income six years to save enough for a down payment on a typical single-family home. In 2020 it would have taken 17 years. If that worker lived in Greater Toronto or Vancouver, it would have taken 28 and 30 years, respectively.

Given this history, one might think that governments would welcome the prospect of a change in labour market dynamics that would turn this around. Instead, we are seeing concerted government actions that undercut the prospect of Canadian workers getting decent pay raises.

The federal government, supported by most provinces, has decided to oblige the business lobby with significant changes to the Temporary Foreign Worker Program, increasing the number of hours per week that international students can work, as well as pushing immigration levels higher. In other words, they are engineering an increase in the supply of labour to hold down wages.

That has come after a virtually non-stop narrative over the last few years about a “worker shortage” in Canada. Businesses are regularly quoted complaining that they cannot find enough workers, and business associations constantly lobby governments to do something about it – usually by bringing in more workers from other countries, either on a temporary or permanent basis.

But in economics, the notion of a shortage of supply in any market is, at best, half-baked. A market balances supply and demand. If there is a “shortage” of supply, then the price in that market rises until the amount supplied is equal to the amount demanded.

In the labour market, if the supply is workers, then the price amounts to what employers pay for them: the package of pay, benefits, and working conditions provided by the employer. For simplicity, let’s call it the wage. So, if an employer is facing a “shortage” of workers, there is a simple solution: offer higher wages.

To be sure, before raising wages, the employer can search harder for employees willing to work at the prevailing wage. In particular, the employer can look to groups that have historically had more difficulty finding employment – for example, people with disabilities or people experiencing discrimination. That would seem to be a good thing. But with unemployment as low as it is, firms have arguably exhausted this option. The only real solution is, again, to raise wages.

Of course, if the employer does have to raise wages, its costs will go up. If the employer is a for-profit firm, this will lower profits. But the firm has options: it could invest in new equipment, or new products or a new business model that would increase workers’ productivity or the value of what its workers produce. Then it could afford to pay those higher wages. Given Canada’s desultory record in productivity improvement, one might think that nudging businesses to be more innovative – through raising wages – would be a good thing.

Alternatively, the firm could raise its prices. If the firm is selling into the international market, there may be some constraint on this. But if the firm is selling into a domestic market that doesn’t face international competition (e.g., restaurants), and the firm’s domestic competitors have raised their wages, too – likely, because of the same worker “shortage” – then it will still be as competitive as it was before.

This would increase the cost to Canadian consumers of that industry’s product, but consider the implications of that. Most of the industries that fit into this category – restaurants, accommodation and janitorial services, for example – already pay below-average wages. On balance, this would mean people would pay marginally more for goods and services so that those with lower incomes could earn more. Would that be such a bad thing?

The final concern about higher wages is that some companies would go out of business. This would certainly lead to some temporary dislocation. But amid that, other, more competitive firms will expand, and new ones will start up. If it happens at a time when labour markets are tight, the adjustment will be relatively painless. It shouldn’t take long for resources to be reallocated to industries that can afford to pay the higher market wage.

This is the very creative destruction business lauds, and the primary driver of a rising standard of living. We used to think this was a good thing.

If businesses must compete for workers, the market will respond with greater innovation and productivity, leading to higher wages. So, shouldn’t we just let the dynamics of a worker “shortage” sort themselves out?

I can understand why businesses want to avoid raising wages. What mystifies me is why Canadian governments are so willing to protect those businesses from the market pressure to raise their productivity game and, finally, reverse decades of depressingly slow wage growth.

Don Wright is a fellow with the Public Policy Forum and a former deputy minister to the premier and head of the public service in British Columbia. He has held senior executive positions in business, government and academia.

Source: About that worker ‘shortage’: Why are governments helping drive down wages?

About Andrew
Andrew blogs and tweets public policy issues, particularly the relationship between the political and bureaucratic levels, citizenship and multiculturalism. His latest book, Policy Arrogance or Innocent Bias, recounts his experience as a senior public servant in this area.

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