The labour market’s bargaining power is eroding

Economist and author Linda Nazareth is the Senior Fellow for Economics and Population Change at the Macdonald-Laurier Institute. Her fourth book, Work Is Not a Place: Reimagining Our Lives and Our Organizations in the Post-Jobs Economy, will be published in 2018.

If the labour market is as tight as the numbers suggest why do governments need to raise minimum wages? After all, as of December Canada's unemployment rate was 5.7 per cent, the lowest since comparable data became available in 1976. All of a sudden there is buzz that the Bank of Canada needs to tighten monetary policy – and soon – to keep wage pressures under control. Surely under the circumstances employers should be bidding wages up for all workers, no legislation required.

In reality of course, a fierce debate is raging over provincial measures to raise minimum wages. In Ontario, where the government is implementing a new $14 wage (an increase of over 20 per cent from the prior $11.60), employers are unabashedly unhappy.

The poster child for bad publicity is donut-and-coffee chain Tim Hortons, where some stores have attempted to offset the rise in labour costs by cutting back on paid employee breaks and other perks. Clearly the debate is not closed.

The reality is that the market for minimum-wage labour is simply not as robust as the figures would suggest. The overall unemployment rate may be the lowest in 40 years, but there is a huge variation between the rates for those with different levels of educational achievement.

For those who only have some high school, the 2017 unemployment rate was 13 per cent, in contrast to 4.5 per cent for those with a bachelor's degree. Given that the first group is disproportionately in minimum-wage jobs (and that the second group is sometimes in competition with them for those jobs) it is clear that workers' bargaining power is not nearly as high as it seems on the surface.

Actually, labour's lack of bargaining power is pretty evident from the data on wage inflation. As of 2017, the average hourly wage in Canada was about $26, which while above the minimum wage is still only 1.7 per cent higher than it was in 2016. In fact, that is the lowest level of wage inflation we have seen since 1998. That wages are growing so slowly tells you a lot about why employers cannot just pass on wage hikes to their customers. Under the circumstances, there is only so much more that people are going to be willing to pay for a Timbit.

It is also telling that the Bank of Canada seems not at all worried about the inflationary effect of minimum-wage hikes. Its recent paper on their economic impact made waves because of the assertion that those hikes would cost 60,000 jobs, which is actually a relatively small number for a labour force of almost 20 million.

What few seemed to note is the Bank of Canada's conclusion that there would be little to no impact on inflation from raising the minimum wage. By their estimates, the total impact for 2018 should be 0.1 to 0.2 percentage points. To put that in perspective, adding that to the November, 2017, inflation rate would take it from 2.1 per cent to 2.3 per cent, hardly a huge increase.

And so we have the reality that the labour market is not nearly as strong as it looks for all the reasons that have been becoming apparent in recent years. People may be employed, but they are a lot more likely to be working a series of part-time jobs than a full-time one. The gig economy is happening more quickly than people or policies can adjust. Robots are not exactly taking over, but automation is eroding the bargaining power of labour. Under the circumstances the unemployment rate seems like a pretty poor measure of how well the economy is doing.

Enticing as the notion may be, the record-breaking unemployment rate is clearly not enough to automatically give workers a raise that will elevate their standard of living. Telling business to take care of things by absorbing costs or passing them on is clearly not a solution either. Until we acknowledge both those realities, the needs of both minimum-wage workers and businesses are going to be at odds and the outcomes to the economy are going to be far from what was intended.