The Quebec government announced this week that it would raise the minimum wage in the province from $7.75 to $8 an hour. Although popular and likely well-intended, this measure will make the Quebec labour market even less flexible, when it is already more highly regulated than elsewhere in North America. Not surprisingly, the province’s unemployment rate has consistently stood above the Canadian and American averages for the last 30 years.
The labour market is of fundamental importance in an economy, allocating human capital to its most productive uses. With the aim of protecting workers, however, governments have instituted various institutional constraints over the years, making this market less flexible. These rigidities have the effect of slowing job creation and pushing up unemployment.
Labour-market flexibility refers to the ease with which workers and employers can negotiate mutually advantageous labour contracts so that remuneration, working conditions and workforce size can fluctuate with the least possible interference.
In situations where qualified workers are in short supply, employers will find it worth their while to offer higher wages and better working conditions to attract the people they need. On the other hand, in areas where job offers are limited, workers will have an interest in lowering their wage expectations and their demands. Where these exchanges can occur with relative ease, an optimal number of job providers and seekers will achieve satisfaction, resulting in the creation of a maximum number of positions.
Government intervention in the labour market generally aims to protect workers by ensuring them a higher income or job security. But when costs rise while worker productivity remains unchanged, some workers start to cost more than they bring in and no longer hold much interest for the employer. For example, a worker whose services generate $7 an hour in revenue for an employer will not be hired if he or she costs $8 an hour.
The minimum wage is a good example of an artificial rigidity induced into the market. A study by the Fraser Institute calculated that in 2004, Quebec already had the highest minimum wage in relation to the local standard of living among the 60 states and provinces in North America, with the annual income of a person working at minimum wage representing 50% of GDP per capita.
When the minimum wage is increased, it seems praiseworthy for the poor, but one forgets that nearly two-thirds of minimum-wage workers are under 25 years old, most studying, with a similar proportion living with their parents or other family members who are not poor. One forgets also that minimum wage is the entryway to the labour market for the least qualified individuals – the last third of minimum-wage workers – who, for various reasons, have little education or work experience (dropouts, immigrants, elderly women returning to the labour market, etc.).
A higher minimum wage has the effect of raising this bottom rung to a height many of them cannot reach, leaving them unemployed. Employers will not find it worth hiring workers whose productivity fails to match the rising costs they generate. Indeed, Canadian researchers have shown that a 10% rise in the minimum wage reduces employment among teenagers by 2.5%.
If the aim is truly to help persons living on low incomes, tax-based measures such as a “work premium” (in other words, a refundable tax credit on employment income) have a much more direct effect on net income, without the perverse effects that a higher minimum wage has on the labour market and on employment.
Another way of seeking to protect workers is to regulate labour relations by favouring unionization. Quebec labour laws are among the most generous and advantageous to unions, and Quebec is the place with the highest rate of unionization in North America. This situation has highly negative effects in terms of labour flexibility.
Researchers have shown that unemployment rises when the laws governing labour relations are too rigid. According to the Fraser Institute, Quebec holds last place with respect to the rigidity of its labour-relations laws, and it ranks 49th among North America’s 60 jurisdictions in the performance of its labour market.
The most effective way to help workers is to keep labour laws flexible, thereby ensuring labour-market dynamism. In a context of high job creation, workers will easily find jobs and wield greater negotiating power when the time comes to set their wages and working conditions. In case of layoffs, they can find other work quickly.
Ultimately, higher incomes and secure jobs are ensured not by strict regulations – but by a scarcity of labour in relation to demand.
* This column was also published in Le Journal de Québec.
Nathalie Elgrably is an Economist at the Montreal Economic Institute and author of the book La face cachée des politiques publiques.