By

Alexander Marriott 

 The Canadian Labor market contains legal barriers to entry for both employers and employees, not unlike the labor markets of all industrialized nations; it is neither a command, nor a laissez-faire system. The barriers in Canada can be separated into two categories, one for those wishing to sell their labor and the other for those wishing to buy or “rent” that labor. Those laws which bar the selling of labor include maximum hour laws (which prevent individual workers[1] from working more than 48 hours a week) and minimum wage laws. Those laws which bar the buying or “renting” of labor include minimum wage laws, healthcare and pension tax requirements which substantially raise the quasi-fixed costs of each additional worker hired, union laws which make the costs of hiring (in unionized markets) higher still, and termination laws which force up the costs in time and money of firing workers and create greater hesitation and screening costs in hiring new employees.

            For the labor market in general the ability of buyers and sellers to come together is assumed, initially, to be free from barrier, as in the graph below.

Of course the result of the minimum wage and hour barrier does not have to be a surplus of labor, which would mean higher unemployment (which is highly exaggerated in the graph). A possible indicator on whether the graph is generally correct would be the Canadian unemployment rate, which, as of March 2004, was a moderately high 7.5%. This suggests (but does not prove) that the minimum wages of Canada are above the equilibrium as opposed to below it.[3]

            The barriers placed upon buyers of labor in Canada (as most everywhere else) are far more numerous than upon sellers. Those referred to in relation to sellers also effect buyers of labor, because a mandated shortage also strains employers as well as those who cannot find work. The 44/48 hour rules of weekly hour employ also restrict buyers by requiring time and a half after 44 hours of work and the hiring of a new employee if an employer needs more than 48 hours of work done in any given week.

            This brings us to the costs associated with hiring a worker. The emphasis is on those costs that are imposed by the Canadian government as opposed to voluntary costs like those associated with training. First among these legally mandated quasi-fixed costs are the pension and healthcare systems of Canada. The public pension system is funded in a similar fashion as the Social Security system of the United States with equal taxed “contributions” from employee and employer and, as such, constitutes a barrier to both employee and employer, as both are made to give up present value for future benefit, except in the case of the employer who gives up present value for no future gain. The healthcare system, which is universal, but run by separate provincial agencies, is funded differently (though in all provinces it is funded in large part by individual income taxes). Ontario, the most populace province in Canada, requires a health tax of 1.95% of employer payroll costs with the first $400,000 exempt.[4] The table below shows how much this could come to at various payrolls. It is useful to keep in mind, that if the amounts seem small, the tax does not take into account net profits or losses and for those firms operating on the margins such a tax could be ruinous, or damaging.

The costs increase as the payroll increases or in other words, as a firm becomes more and more able to hire additional people it also becomes more and more costly to do so. Again, all of this is relative to how well a firm is doing. If the firm is operating on the margins, these costs could be a serious barrier to hiring more workers.

            The Canadian Welfare system, while undergoing dramatic reforms in recent years, still supports 5.5% of the Canadian population (though not fully and entirely).[5] The Canadian government has yet to repudiate, as the Federal government of the United States has, the unlimited entitlement to welfare so the incentive to leave welfare is not as high as it might be.[6] This situation also means that private sector employers are competing against welfare payments for employees. For instance, in Ontario, the typical welfare payment (over the course of a year) to an employable single adult is $6,240, roughly the equivalent of twenty-two 40 hour weeks at the Canadian minimum wage of $7.15 an hour.[7]

The payment of welfare is decided entirely on need and requires that the recipient be involved in job training and placement services provided by the Canadian government and other associated groups. There is no time barrier on the reception of the aid however and will continue as long as the person is still in a situation which qualifies under the ever changing guidelines. The average stay on Canadian welfare has been shown to be about 25 months or more, suggesting that people have found a way to make the aid payments (along with part-time work and supplemental incomes) substitute for what many might consider to be the normal route of working in some sort of full-time career.[8]

The graphs below show different indifference curves that low wage earners or the unmotivated may have which may help to explain the long stays on welfare in Canada.

            Another barrier to hiring in Canada is the privilege afforded to unions in the employee-employer relationship. As of 1999, thirty percent of the Canadian workforce belonged to unions or other collective bargaining organizations, so looking into the barrier such organizations represent is important to understanding the regulatory climate in Canada.[9] The union wage premium in Canada as of 1999 was 8%, which was lower than previous years (1986 for instance recorded a premium of 20%), but it still meant that being in a union resulted in a higher wage. The average union wage in Canada in 1999 was $20.36 an hour while the average for the non-union worker was $17.82.[10] Union organization is a protected right of Canadian workers who can choose to join or form a union at will without being fired by their employers for doing so. This is the standard practice in most industrialized nations.[11]

The graph below shows the effect on the profits of a hypothetical firm in Canada both unionized and not. The isoprofit curves intersect the firm’s labor demand curve at both the union and non-union wages, but since the union wage is higher it means that the firm’s profits along that particular isoprofit curve are less. The graph also illustrates the pressure unions put on the unemployment rate, as their ability to gain higher wages lies in their legally protected ability to restrict the labor supply of an individual firm or group of firms.

            The procedures in place for terminating employment in Canada constitute another barrier for buyers of labor. The harder it is to lawfully release workers, the higher are the prohibitive costs in time and money of the employer to hire (and take on the risk of firing) new employees. In Ontario, dismissal of employees can be a complex task guided and regulated by the Federal Employment Standards Act (ESA). According to the government of Ontario an employer can dismiss an employee at any time, but “must provide proper written notice, or termination pay instead of notice.”[12] But even that rule has exemptions, such as an employer being prohibited from firing an employee (even if they are willing to give proper notice or termination pay) if the reason is that the employee is questioning the employer about the ESA. The length of notice the employer is required to give increases with the length of employment, meaning that the longer one works at a firm the more costly it will become to get rid of that person. If the employer doesn’t wish to wait the period of time, which could go as high as eight weeks for employees who had been at the firm for eight or more years, the other option would be to pay a lump sum equivalent to the wages the employee would get for whatever period of time is mandated for termination notice. [13]

            Consider for a moment the prospect of firing a non-union employee paid at the 1999 average wage of $17.82, assuming you can fire the person, at the different costs set up under the ESA. The table below illustrates just what those costs would be given the different periods of notice or the different amounts to be paid in lump sums.

[14]

            Clearly, firing employees in Canada can be a costly proposition, especially if they have been with the firm for a long period of time. This higher than normal (i.e. being able to hire and fire at will or pursuant to a written contract between the two parties) cost to employment termination means that the costs of hiring are raised and will make employers much more careful in their decision to hire so that they can, hopefully, not fire their employees. As an added “bonus,” employers who go out of business are required to finance severance pay for all employees who have worked for them for five years or more. Even in bankruptcy employers cannot escape the added legal costs of hiring employees.[15]

            After reviewing legal barriers to the sellers of labor, like minimum wage and maximum work hour laws, as well as a mere fraction of the legal barriers put upon buyers of labor, it is clear that the Canadian labor market is one of many restrictions and inflated costs. To what degree these restrictions have contributed to Canadian economic troubles over the past few years and the current rate of moderately high unemployment is hard to ascertain without a much more detailed analysis, but from what has been discussed here it is quite obvious that even these barriers must have some negative impact on the Canadian economy. The difficulties in firing employees, the tax rates imposed for the universal health system, the union wage premium and restrictions to the labor supply that unions promote, the competition for labor provided by the handout of “free” money in the Canadian welfare system, and the numerous other barriers imposed upon the labor market all have an impact and invariably raise the costs of hiring workers and running a firm in Canada. The degree to which this will hurt the Canadian economy will depend upon the relative savings firms can find in other countries. One thing is clear, the closer such savings can be found to Canada (thus lessening the expense of moving) the more likely it will be that firms will see an incentive to move to freer labor markets.

[1] This can be overcome by a prior agreement between the individual employee and employer, which may, depending on the occupation, need to be approved by a government official.

[2] The general minimum wage in the most populous Canadian province, Ontario, was changed to $7.15/hour on February 1, 2004. This information was taken from the Ontario Ministry of Labour website at [http://www.gov.on.ca/LAB/English/es/factsheets/fs_wage.html].

[3] From “Canadian Statistics” from the Canadian Government’s online website, [http://www.statcan.ca/english/Pgdb/econ70.htm].

[4] Province of Ontario, “Employment Health Tax – Guide for Employers,” [http://www.trd.fin.gov.on.ca/

userfiles/page_attachments/Library/3/irie_eht_guide_for_employers_march_2003.htm#link17].

[5] The Canadian government website reports the population to be 31,752,842 [http://www.statcan.ca/start.html], while the number of people on welfare in Canada numbers 1,745,600 [http://www.ncwcnbes.net/htmdocument/principales/numberwelfare_e.htm].

[6] The Fraser Institute, “7 Recommendations for Canada,” [http://oldfraser.lexi.net/publications/

critical_issues/2001/welfare/section_12.html].

[7] National Council of Welfare, “Welfare Incomes 2002,” [http://www.ncwcnbes.net/htmdocument/

reportwelfinc02/Welfare2002_e.htm#_Toc500047774].

[8] “7 Recommendations for Canada.”

[9] PricewaterhouseCoopers, Doing Business and Investing in Canada (New York: PricewaterhouseCoopers, 1999), 77.

[10] “Union wage premium,” The Daily (26 September 2002), [http://www.statcan.ca/Daily/

English/020926/d020926i.htm].

[11] Doing Business and Investing in Canada, 78.

[12] Ontario Ministry of Labour, “Employment Standards Fact Sheet – Termination of Employment,” [http://www.gov.on.ca/LAB/English/es/factsheets/fs_termination.html].

[13] Ibid.

[14] Information for the table was taken from the Ontario Ministry of Labour, “Employment Standards Fact Sheet – Termination of Employment.”

[15] Ibid.