Montreal, April 4, 2019 – While the unemployment rate is at its lowest and the country’s labour shortage is regularly in the news, workers should have the upper hand and be enjoying substantial wage increases. But trade barriers and the tax burden keep them from fully benefiting from this favourable context, as shown in an MEI study published today.
“A labour shortage should lead to higher wages through the simple application of the law of supply and demand,” points out Mathieu Bédard, Economist at the MEI and author of the publication. “When there’s a potato shortage, their price goes up. But that’s not what is happening right now in Canada. Wages are not keeping pace, and their increase is barely more than inflation.”
While wages did go up in Canada in 2018, the increase was slight: Hourly rates grew by 2.9%, whereas the inflation rate was 2.3%.
Several factors can explain this situation, but interprovincial trade barriers and the tax burden both undermine workers’ productivity, which has the effect of limiting wage increases.
“Trade that is more difficult hinders the division of labour and makes our economy less efficient,” explains Mr. Bédard. “Moreover, the tax burden weighs heavily on investment and slows the accumulation of wealth and the amount of capital there is to invest, for individuals and companies alike.”
The provinces where the labour shortage is the worst, and where salaries are the slowest to react, are also provinces where this burden is high. “This is not surprising. Investment allows workers to be more productive by producing more goods and services more quickly, which allows companies to pay higher salaries,” adds Mathieu Bédard.
Regulatory barriers and taxes that are too high keep Canadian workers from earning as much as they should. A less regulated and less taxed economy, with freer trade, would benefit workers and would lead to them being better paid.
The Viewpoint entitled “Labour Shortage: What Is the Effect of Regulation?” was prepared by Mathieu Bédard, Economist at the MEI. This publication is available on our website.
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