Bending Over Backwards: Is Canada’s Labour Market Really Inflexible?

The notion that Canada’s chronic unemployment problem is due in large part to labour institutions and social policies which have made our labour market too “inflexible” has gained wide currency in both academic and policy circles. As a result, proposals intended to enhance labour-market flexibility have attracted top billing in recent Canadian discussions regarding employment strategy and social policy reform. For example, the Finance Minister’s influential 1994 pre-budget discussion document, the so-called “Purple Book” (Department of Finance, 1994), stresses the importance of “encouraging Canadians to adapt to change”. It asserts that payroll taxes and “disincentives” arising from social programs have been dominant explanations for the rise in Canada’s “core” rate of unemployment, and suggests that labour market regulations (such as measures governing arbitrary dismissal and other employment security laws) have “reduce[d] the willingness of many employers to take the risk of hiring a new employee”. Similarly, the federal government’s Green Paper on social policy reform (Human Resources Development Canada, 1994a) includes references to “fostering labour mobility” and “flexible work arrangements”. It claims that Canada’s Unemployment Insurance (UI) system “does not work well for the growing number of Canadians who need help adjusting to changes in the labour market, at a time when adjustment to change is essential”. The Governor of the Bank of Canada has echoed these sentiments, suggesting in his semi-annual review of monetary policy (Bank of Canada, 1995) that unemployment would drop in Canada if government took various measures (including reducing the payroll taxes that fund UI and other social programs) to enhance labour market flexibility. The editors of The Globe and Mail (1994) concluded that the optimal employment strategy for Canada is to “undo the rigidities that prevent labour markets from doing their job, which is to see that all available labour is employed in its best use”. Indeed, the call for labour market flexibility is an international one. Many Canadian commentators have taken their cue from the OECD Jobs Study (Organization for Economic Cooperation and Development, 1994a) This report presented a menu of flexibility-enhancing policy changes (including restricting UI benefits, removing regulations governing retirement and employment security, reassessing minimum wages, and reopening collective agreements to facilitate wage reductions) that would presumably enhance labour market flexibility. The Jobs Study followed an earlier OECD study on the particular institutional features of Canada’s labour market (Organization for Economic Cooperation and Development, 1991), which found the UI system and other programs to “impede labour-market efficiency” and “reduce mobility incentives”. In international comparisons of labour-market flexibility, the United States is generally seen to possess the most flexible and hence “efficient” labour market, and consequently enjoys a low rate of unemployment (compared to most other industrialized countries).1 Chronic, high unemployment in Europe is seen as a symptom of an “over-regulated” labour market. Canada’s experience is