Economics of Prohibiting Replacement Workers

Parliamentary hearings into Bill C-257, a private member’s bill to ban the use of replacement workers for federal industries began earlier this week. At first glance, legislatively prohibiting replacement workers or what unions have coined “scabs” may appear to help Canadian workers. The reality however is much different. Prohibiting replacement workers will make already unbalanced federal labour laws even more biased and in the process reduce Canada’s investment competitiveness. The end result will be reduced investment and lower rates of job creation.

Labour relations laws regulate the process by which unions gain and lose the right to collectively represent workers and regulate a company once it is unionized. The goal of these laws should be to balance the rights of workers to collectively organize against the right to reject such representation and the rights of employers. Balanced labour laws are critical in creating and maintaining a functioning and dynamic labour market, one characterized by high rates of job creation, low unemployment rates, and strong productivity and income growth.

Unfortunately, many Canadians, including most of the advocates for banning replacement workers, think the goal of labour laws is to favour one group (unions) over all others. Put differently, these groups seek to gain advantage over others through labour laws.

The way a society regulates labour markets has broad implications. There is a large and growing body of research indicating flexible labour markets out-perform regulated ones in terms of incomes, job creation, unemployment, and investment.

Unfortunately, Canadian labour relations laws are the most unbalanced and biased in favour of unions in all of North America. In a recent empirical analysis examining labour relations laws, federal laws in Canada were ranked 61st out of 61 jurisdictions (10 Canadian provinces, 50 US states, and the Canadian federal government) in terms of balance and the promotion of labour market flexibility.

There are numerous examples where Canadian labour laws have been designed to favour unions over other groups including individual workers. For instance, Canadian federal law is one of only six jurisdictions in North America to permit the certification of a union without an anonymous secret ballot vote. In addition, Canadian federal laws are one of only six jurisdictions to require employers to notify unions of technological investment if it has the potential to affect a collective agreement and permits unions to grieve the investment. Canadian federal laws are also one of only eight jurisdictions in North America to permit the picketing (disruption of business) of firms not involved in a labour dispute. In other words, it is legal to picket a supplier or customer of a firm that is involved in a dispute with its workers even if that firm has nothing to do with the dispute.

Adding a ban on replacement workers to the already prejudiced set of federal laws will simply make Canadian federal labour relations laws that much more biased and unbalanced. In this case it will allow unions to shut down businesses during disputes.

Professor John Budd of the University of Minnesota has published two important studies examining the economic affects of replacement worker bans. The first, published in the Journal of Labour Economics found that replacement worker bans reduced employment compared to what would have been expected in the absence of such laws. In another study, Professor Budd examined provincial investment data over a 30-year period and concluded that the investment rate in provinces with replacement worker bans was lower than in provinces without them. Budd’s work indicates that replacement worker bans will lead to less investment and less employment.

The impact of replacement worker bans on investment is made all the more relevant considering that investment plays a critical role in federally-regulated sectors such as banking and telecommunications. Indeed, if Canadians want to be competitive and remain at the technological frontier of these sectors then the fact that these types of laws dissuade investment should be of paramount concern.

Fortunately, a relatively easy solution exists that achieves both flexibility and fairness. The federal government can simply adopt what is essentially a North American standard: permit temporary replacement workers but do not allow them to permanently displace existing (picketing) workers.

Labour market regulation plays a critical role in allocating our most valuable resources: human endeavour and ingenuity. The goal must be to create a set of labour laws that balances the rights of workers and employers. Prohibiting replacement workers will ultimately hurt Canadian workers rather than help them.