Labour Day Highlights Government’s Pursuit of Bad Labour Policies

Labour Day has traditionally been a holiday marked by parades, picnics, and other community festivities to celebrate the Canadian worker. But festivities this year will likely be sombre events compared to years past, given that Canada has lost more than 300,000 jobs and unemployment has increased significantly over the past year.

With such gloom on the labour front, why then are governments continuing to focus on misguided policies that rather than increasing employment, only make things worse?

Consider calls to further increase the generosity of Canada’s Employment Insurance (EI) system. Currently, most Canadians need to work between 420 and 700 hours in the past year to qualify for employment insurance benefits. Over the past several months, the federal Liberals have been pushing for a dramatically reduced EI qualification period of 360 hours, or nine weeks. Unfortunately, providing 50 weeks of benefits after only nine weeks of work will encourage some Canadians to collect EI rather than continue to work. The end result will be a significant and permanent increase in Canada’s unemployment rate. 

Indeed, previous changes to Canada’s EI program, as well as international evidence, have shown that making the EI program more generous leads to both an increase in unemployment rates and longer spells of unemployment.

A similarly well-intentioned but job-killing policy is the increase in minimum wages introduced by most provinces. Employers respond to minimum wage increases by reducing the number of workers they employ and/or the number of hours their employees work. In other words, minimum wage increases result in higher unemployment for young and low-skilled workers.

This unpleasant reality is well-documented in the research. For example, a recent, comprehensive study by David Neumark and William Wascher reviewed more than 100 studies covering 20 countries over the past 15 years and found that the “overwhelming majority” of studies, especially the most credible, consistently show that minimum wage increases result in decreases in employment.

If Canadian governments truly want to increase employment, they should focus on polices that improve the flexibility of the labour market. Labour market flexibility-- the ease with which workers and employers can reallocate their resources to take advantage of changes in market conditions – is a key aspect of a well functioning labour market.

There is a large body of research that confirms flexible labour markets lead to better labour market performance: strong job creation, low unemployment, and relatively strong productivity. The seminal studies among these were completed by the Organisation for Economic Co-operation and Development (OECD) in 1994 and 2006. They concluded that countries with more flexible labour markets enjoyed better records of job creation and higher rates of economic growth.

Improving labour market flexibility is especially important in an economic downturn as firms attempt to respond to changes in market conditions through restructuring and reorganization, and workers attempt to move from declining sectors and/or regions to prospering ones.

So called “successor rights provisions” are a good example of how labour laws affect firms and thus labour market performance. Successor rights provisions determine whether and how collective bargaining agreements survive the sale, transfer, consolidation, or otherwise disposal of a business. If a business or a portion of a business is rendered uneconomical, stringent successor laws will impede the reorganization of the business and the efficient reallocation of its capital.

Legislation in every Canadian province, as well as federal laws, make existing collective agreements binding upon a new employer. Moreover, successor rights in Canada apply even to changes of ownership due to bankruptcy. Needless to say, successor rights impede and frustrate the restructuring process, making it harder for firms to respond to changes in economic conditions, and can lead to idle labour and capital.

Although it was conceived as a celebration of the average worker, Labour Day also provides a reminder of the impact labour policies have on workers. Yet our governments to date have shown more willingness to focus on labour policies that will ultimately exclude the young and the unskilled from the labour force and increase the unemployment rate.

The sombre celebrations of this Labour Day should send a message to Canadian governments that it’s time to implement labour laws that are more balanced and less prescriptive if they want to create a dynamic, well functioning labour market that can successfully respond to ever changing economic conditions.