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The economics of temporary foreign workers

Date

2007-06-29

Authors

Mark Lee

Publisher

The Progressive Economics Forum

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A dispatch from UBC labour economist, David Green:

Wages, Markets and Temporary Workers

David A. Green

Last November, the Minister of Citizenship and Immigration Canada (CIC) announced a scheme to speed up the processing of temporary workers for Alberta and British Columbia. The Minister appears to have been concerned with ongoing reports of large numbers of job vacancies going unfilled. In response, he pursued several initiatives, with the key one being to establish province specific lists of “occupations under pressure” for Alberta and BC.

Employers who need to hire workers in occupations on their province’s list, “may now be eligible to follow shorter, simpler and less costly advertising requirements to recruit the workers they need.” In essence, the time to check on whether there are Canadians who would take the job has been cut, reducing the overall processing time for a temporary worker application by two to four weeks.

The underlying idea behind this policy is that there is a potentially substantial problem for the functioning of the economy arising because of “labour scarcity”, particularly in the two western-most provinces, and that the appropriate response is to bring in temporary workers to lessen the scarcity.

But does this policy make good economic sense? Both economies are booming and demand for goods and services of all types is high. With only a certain amount of labour available in each province, there is strong pressure on wages to rise. At this point, Economics 101 tells us, the price mechanism kicks in. As wages rise, and with them the prices of goods and services, consumers will choose what they most want to consume, and the scarce labour resources will end up employed most in producing what is most demanded. In the lingo of economists, this is called achieving “allocative efficiency”.

Perhaps the most important of the price signals being sent in these booming labour markets is the signal to young people on whether to get training and of what type. The special lists of occupations for BC and Alberta are filled with trades occupations such as carpenters. Trades and business organizations lament the insufficient numbers of young people seeking trades training.

But, why would anyone expect them to select those occupations if the policy message we send is, “These are jobs with erratic demand. In bad times, you’re on your own. In good times, we’ll bring in temporary foreign competition to make sure your wages don’t get too high.”

Similarly, it is not clear why one would want to block wage adjustments that induce workers in parts of the country where demand is low to go where demand is high.

A third type of adjustment induced by wage and price responses to increased demand for labour is in how firms produce goods and services. When labour is relatively expensive, firms find ways to use capital instead. In a low-wage economy, such an invention would not pay – the work would be done by an army of low-paid workers. This is an important lesson when business interests cry that the economy will face disaster if labour shortages are not fixed. Those cries suggest that the economy is like a simple machine that will come to a grinding halt if one cog is missing. In fact, the economy is more like an organic entity that adjusts to different conditions. An economy with relatively expensive labour will not grind to a halt, it will simply produce in different ways. That is the beauty and power of a market system.

Some businesses will argue that they cannot find workers “at any wage”. But they really mean, “at any wage near what they are used to paying” or “at any wage that wouldn’t require me to raise my prices dramatically”. A good example of this can be found in a recent article in a national newspaper on responses to “labour shortages”. While the Wickinninish Inn, on Vancouver Island, argued they had to bring in temporary workers because of shortages, the Empress Hotel in Victoria stated that they did not face a hiring problem because they simply paid higher wages. Again, it is the wage signals that come from this competition for labour that causes consumers to adjust their demand according to the resources we actually have available, that causes new workers to go where the jobs are, and that causes firms to make the right decisions about how to produce.

An irony of the current situation is that business groups often seem to argue that they want government out of their way to let them do what they do best in a free market economy. Yet, what is being proposed, instead, is old-fashioned government meddling in markets.

A final consideration is that the real average weekly wage of a high school educated male starting a new job in 2005 was 25% lower after adjusting for inflation than the wage for a similarly educated man in 1980. Essentially, through several years of tight labour markets, workers with high school education have benefited very little in terms of their wages. The Minister seems intent on keeping their wages low.

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