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?

Douglas Todd: B.C.’s housing-addicted economy not sustainable, experts fear

Same could be said for Canada as a whole. Good observations by those quoted in the article (Don Wright, David Williams, Stephen Punwasi):

B.C.’s economy is not as healthy as it might appear, since it relies too much on housing and newcomers to keep it above water, say prominent economists and analysts.

The real estate sector makes up a much larger section of the B.C. economy than in the rest of the country. The B.C. economy is heavily reliant on large-scale flows of people arriving each year from other provinces and countries, say the specialists.

They maintain B.C. has not been effective at developing its resources, businesses and industrial capacity in a way that increases wages and improves productivity. This B.C. phenomenon, going on for two decades, puts demand pressure on housing prices.

Don Wright, former head of B.C.’s civil service, says there is a general feeling among British Columbians that the economy is healthy because unemployment is relatively low and government revenues stable.

But there is a distinct possibility the economy is not sustainable, Wright says.

B.C.’s trade deficit has been growing steadily since 2005. The province, he said, is “spending about $28 billion more per year than we are earning.”

Both Wright and David Williams, senior policy analyst for the Business Council of B.C., say the provincial economy is too dependent on large-scale in-migration to bring in capital, which fuels the housing sector and props up spending on goods and services.

Last year, according to the B.C. government, the province welcomed a record 100,000 new people. About 33,000 came from other provinces, which is the highest amount in three decades. The other 67 per cent arrived from other countries, a lower proportion than normal, and most chose Metro Vancouver.

B.C. has an unusual economy because it hinges so heavily on “outside money;” on new arrivals coming in to “buy real estate and support consumption with income earned elsewhere,” says Wright, an economist who gives presentations on the issue to Ottawa politicians and business organizations.

“In essence we are ‘exporting’ the right to reside in B.C.,” Wright says.

“This has become our largest ‘export industry.’ It accounts for more than twice the annual level of forest industry exports. In the short run, this injection of dollars does create the impression of a healthy economy, but how long can this go on?”

The business council’s Williams generally agrees. A tremendous amount of B.C. money is going into “housing-related consumption,” he says.

But investment dollars are not flowing strongly enough into such things as new machinery and equipment and intellectual property rights, said the business economist. Those sectors can much more add to the “economy’s future productive capacity” and potentially increase stagnant wages.

In-migration should not be seen as a cure-all for the economic woes of Canada or B.C., says Williams.

He questions the way Canada, particularly B.C., depends on “record immigration levels to turbocharge population growth and housing demand.” Canadian economists believe immigration numbers have an overall neutral effect on real wages and gross domestic product per capita.

According to Stephen Punwasi, of Better Dwelling, B.C.’s economy is almost twice as reliant as neighbouring Alberta on real estate, which accounts for 20 per cent of B.C.’s GDP.

That compares to an average of 13.5 per cent across the country, a proportion that is still much higher than in the United States. If B.C.’s construction industry is included, it adds up to almost one third of B.C.’s GDP coming from real-estate related services.

Canada, and especially B.C., are “addicted” to real estate-driven growth, says Punwasi, who maintains it’s an unhealthy dependence that won’t be easy to break.

Wright, who was NDP Premier John Horgan’s deputy minister until stepping down last year, cites the danger of over-relying on new arrivals.

When 100,000 people move into B.C. and buy houses and services “it creates the illusion that the economy is strong. But for me the question is, ‘Is it sustainable?,’” Wright says.

“Let’s say somebody from outside B.C. retires to Comox and buys a place. And they’ve accumulated a lot of net wealth over their life. Whenever they spend money, it’s money that’s not being earned in B.C. In the short term it’s not bad for the economy, because it creates employment when somebody goes out and eats at a restaurant.”

But Wright doesn’t think relying on imported wealth is sustainable — for two reasons.

The first is that “you only get to sell off a piece of real estate to somebody outside the province once,” he said.

“And another reason is it’s not socially sustainable: Young people cannot afford a house anymore.” And too many new real-estate units are not suitable for families.

“A whole generation is going to be frozen out of the housing market, unless they have a well-capitalized, generous bank of mom and dad.”

What might happen to B.C. “when the party stops?” Wright asks, referring to a time when newcomers stop bringing in tens of billions of dollars each year from beyond provincial borders?

B.C., he said, will need to restructure by strengthening sectors such as forestry and mining, manufacturing and high tech — all of which are capable of producing superior middle-class wages.

“We better know,” Wright says, “how to rebuild the standard of living of the next generation.”

Source: Douglas Todd: B.C.’s housing-addicted economy not sustainable, experts fear

Former BC DM Wright: Rhetoric vs. Results: Shaping Policy to Benefit Canada’s Middle Class – Immigration excerpt questioning approach

Interesting and relevant paper on rebalancing policy priorities. Excerpt on immigration of note:

Some nuance on immigration policy, please (it’s GDP per capita, stupid!)

There is a growing push from opinion leaders and decision makers to

significantly raise the level of immigration.[19] The current federal government has raised the target for annual immigration levels and seems on a path to raise it further down the road.

Let me state upfront that I am in favour of maintaining immigration at significant levels. Over the past 60 years Canada has evolved into a wonderful multiethnic, multicultural nation. That doesn’t mean it doesn’t have issues with tolerance and inequitable socioeconomic outcomes. But the general view of the

population is that immigration continues to be positive for Canada.[20] Furthermore, Canada has a moral obligation to do its share of ameliorating the suffering of the millions of refugees created from regional wars, civil wars, ethnic cleansing and failed states.

Given the emphasis in this paper on the essential need for tightness in the labour market, however, it is important to consider whether higher immigration levels will be helpful or harmful in re-establishing a rising standard of living.

The rationale for the need to increase immigration levels weaves together four elements:

  1. To offset the challenges of the aging baby-boomer bulge in the population pyramid;
  2. To keep GDP growing by increasing the labour supply and the demand for goodsand services;
  3. To realize greater economies of scale; and
  4. To supply employers with the workers they cannot find.

The first of these sounds reasonable on the face of it. But there is much less

there than one might suppose. The age structure of immigrants is not that different from the existing population in Canada. On average it is somewhat younger, but not dramatically so. This is because, in addition to prime working age adults and their children, the immigration mix also includes family class parents and grandparents. This has led at least one analyst to joke that the only way immigration could be a solution to the population pyramid problem is if Canada only accepted 15-year-old orphans as immigrants.

A recent analysis[21] shows that “changes in immigration levels have impacts on the margin only: no increase within the realm of practicality can prevent population aging. Other policies to ease the demographic transition, notably encouraging people to work longer are at least as powerful.” The authors calculate that Canada would need to raise immigration levels to 1.4 million a year to even out the population pyramid. In 2019, 341,000 — a record level — arrived in Canada.

The second is more than a little specious, hence the somewhat rude subtitle for this sub-section. Almost daily news items quote somebody of influence saying the only way to increase the rate of growth of GDP is to increase immigration. Some interests will benefit from increasing immigration levels — employers who would prefer a buyers’ labour market to a sellers’ labour market, the real estate industry, financial institutions that provide mortgages and people who already own their homes. But the critical metric is not GDP; it is GDP per capita and how it is distributed.

Source: https://ppforum.ca/publications/don-wright-middle-class/?output=pdf