Government assaults on unions: the economic history and the consequences

July 6, 2011

In the early 1980s, the world was gripped by recession. Following the troubled years of the 1970s, there was considerable worry throughout the developed world that we had entered a period of endemic stagnation. The real problem, it was claimed, was that the western economies had lost their ability to innovate and take risks.

Two culprits were singled out as stymieing the ability of entrepreneurs to generate growth. The first was a combination of high taxes and regulations that purportedly made it hard for companies to do their business and “robbed” them of their rewards for taking risks. The second, it was claimed, could be found in high labour costs resulting from a combination of overly generous social programs and overly strong unions.

The response enacted in Reagan’s American and Thatcher’s Britain was to cut taxes and regulation while targeting unions and reducing the generosity of the welfare state.

A key tenet of the new policy direction was that all would eventually benefit from policies that seemed, on the face of it, to target workers and the poor. Once growth returned, it was argued, the benefits would trickle down to everyone. Workers might face lower wages initially but they would have higher employment rates and, eventually, higher wages as demand for labour grew with the economy.

The relative experiences of the US and Europe in the 1990s seemed to give credence to this theory, as the “US Miracle” of sustained growth and low unemployment contrasted with “Eurosclerosis.” The OECD promoted the US policies to the rest of the world in its Jobs Strategy, which, as its name suggests, focused on employment as the key outcome. The goal was to focus on employment and let the wages fall where they would.

Canada became something of a poster child for the OECD strategy. We spent considerable effort in the 1990s gutting the social assistance and unemployment insurance systems, with a goal of “putting work first.” There was also considerable lip-service (though not always as much action) given to upgrading worker skills. Workers were now to be life-long learners, taking on a greater share of labour market risk in order to give firms the elbow room they needed to innovate.

No one seems to have bought into the claim that low labour costs are a necessary ingredient for economic growth more whole-heartedly than the Harper government. This can be seen very clearly in the statements that Harper and his ministers have made about the Canada Post lock-out. Not only does their back-to-work legislation seek to end the strike, it proposes wages lower than what the firm had already offered. One can only assume that they believe that wages need to be kept low for the benefit of economic growth during the recovery.

The same type of reasoning appears to be behind the Temporary Foreign Worker (TFW) program. The Harper government increased the number of TFWs by over 50% between 2004 and 2008, only mildly cutting back the inflow even at the height of the recession. And now it is gearing up to push the TFWs up to higher levels. Again, the claim is that economic growth will be stymied if firms don’t have rapid access to low cost labour.

But has this approach paid off? Not if one focuses on wages. Between 1981 and the mid-90s, the real starting wage of new job starters with a high school education fell by over 25%. In the boom years of the 2000s there was improvement, but by 2007, just before the recession, it still remained 10% below its levels in the early 1980s. Employment rates have been better than in the 1980s but a substantial portion of the jobs have lower wages.

The claim that focusing uniquely on meeting business demands will yield benefits in the form of good jobs is clearly not coming to pass.

In fact, the basic tenet of the new policy regime – that any increase in wage costs kills jobs and growth – means that the regime cannot deliver good jobs to workers by definition. When demand conditions in the oil patch start pushing wages up, the government responds by bringing in large inflows of temporary workers to keep them down. In the late 2000’s, the priority list for speedy processing of TFWs in BC and Alberta included food counter workers. There is no argument about economic growth that implies a need to staff fast food counters quickly. Clearly the government bought into an argument that all wage increases are bad.

More recently, we have learned that firms in the oil patch are training workers in Mexico in order to get ready to bring them in as TFWs. Is this the policy direction we want? Is investing in training for workers elsewhere in order to make it easier to keep Canadian wages low really the path to a healthy economy and society? 

The response on the other side, of course, is that we have no choice. Any increases in wage costs will kill growth.

Is this really true? In recent work with Paul Beaudry from UBC and Ben Sand from York University, we found that a 10% increase in wage costs in an economy implies a 3% reduction in the employment rate. This is not zero – there are tradeoffs – but it’s a long way from what the Harper government seems to believe.

This highlights a need for a debate on a key question: do we really want Canada to be a low wage society?  Do we really believe, as the American approach embodies, that the only legitimate goal of labour and social policy is employment? Policies that focus on generating good jobs with good wages and stability are possible without creating economic stagnation. We need to find the balance that is right for Canada. The low-wages-above-all approach of the Harper government needs to be challenged.

David Green is a professor in the economics department at the University of British Columbia, an international research fellow at the Institute for Fiscal Studies in London, and a research associate with the CCPA’s BC office.