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Rigid labour laws hurt the unemployed, says the Montreal Economic Institute

Montreal, December 14, 2006 – Stringent labour laws explain in part why Quebec has had a consistently higher unemployment rate than its neighbours over the last three decades, the latest Economic Note from the Montreal Economic Institute indicates.

The study opens with the observation that the labour market is of fundamental importance in the economy, providing for the allocation of human capital to its most productive uses. With the aim of protecting workers, however, governments have established various institutional constraints over the years, resulting in a less flexible labour market.Moreover, Quebec’s relatively high minimum wage, intended to help low-income workers, in fact penalizes them by making it harder for them to enter the labour market, says the study, signed by well-known economist Nathalie Elgrably.

Young workers fall victim to ineffective policies

The Economic Note explains that minimum wage jobs are the entryway to the labour market for the least qualified individuals, including many young people, immigrants and older women. Thus, two-thirds of those working at minimum wage are under 25. The lowest-paid workers are by definition the least productive, meaning that a higher minimum wage raises the bottom rung of the labour market ladder to a height that many cannot reach, thereby helping keep them unemployed.

Rises in the minimum wage do not help reduce poverty but instead create at least some unemployment. Canadian researchers have found that a 10% rise in minimum wage reduces employment by 2.5% among teenagers. Ms. Elgrably reminds us that Quebec has North America’s highest minimum wage when differences in standard of living are taken into account. The average income of someone working at minimum wage comes to 50% of GDP per inhabitant, the continent’s highest proportion.

If the government truly wants to help low-income workers, it should turn instead to tax measures, which have a far more direct effect on net income without the minimum wage’s perverse effects on the labour market and on employment. “Helping workers directly is preferable to manipulating the price of labour, which destroys jobs,” Ms. Elgrably asserts. The “work premium,” a refundable tax credit on employment income instituted by the government in 2005, represents an example of this type of measure.

A rigid market leads to high unemployment

In addition to minimum wage, the Economic Note deals with the relationship between labour market flexibility and unemployment. A market made rigid by various laws, regulations and government interventions adds to the costs and risks of hiring, which in turn feeds unemployment.

“Researchers have shown that unemployment rises when the laws governing labour relations are too rigid,” Ms. Elgrably notes. “Quebec holds last place among the continent’s 60 states and provinces with respect to the rigidity of its laws.”

Quebec labour laws also stand out for being among the most favourable to unions. The province has the highest rate of unionization in North America. The Note points out that this has highly negative effects on labour flexibility.

Higher incomes and secure jobs are ensured not by stringent regulations but by a scarcity of labour in relation to demand in a flexible and dynamic labour market.

Titled The minimum wage and labour market flexibility, the document is available on the Institute’s Website.

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