BUEC 280 LECTURE 2

Labour market institutions, government regulation

The labour market in the national economy

The labour market is one of many markets that comprise the economy

We divide agents in the economy into two types: households (comprised of individuals), and firms

We divide markets into two types:

Product markets where the output of firms (goods and services) is sold to households

Factor markets where the inputs to production (called factors of production) are sold by households to firms

We summarize this with the circular flow model

The circular flow model

Households•Buy goods & services

•Sell factors of production

Factor Market•Households sell•Firms buy/rent

Product Market•Firms sell

•Households Buy

Firms•Produce goods & services•Rent factors of production

Goods and services

Spending Income

Labour, land, and capital

Inputs to productionGoods and services

Wages, rent, and profitRevenue

Supply and demand for labour

Households supply labour

Firms demand labour

Demand for labour may be final demand or

derived demand

Demand for labour curves slope upwards

Supply of labour curves may be upward-sloping or

backward-bending

Labour Market Institutions

Labour market is more highly regulated than most

Regulations have two major goals: Protecting rights of workers and firms

Protecting well-being of workers

Issues we’ll discuss today: Jurisdiction (who is responsible for what)

Employment standards

Human rights, health & safety, worker’s compensation

EI

Unions

Jurisdiction

The British North America Act (1867) and the Constitution Acts (1867, 1982) define the jurisdiction (authority) of various levels of government in Canada.

BNA Act defines industries over which the federal government has the authority to legislate.

Interprovincial and national industries (federal government, railways, airlines, banks, grain, shipping, communications, military, etc.)

Canadian Labour Code legislates employment standards and labourrelations practices for these industries (small percentage of total employment).

Jurisdiction of all other industries delegated to provinces.

Provincial Jurisdiction

Provinces have jurisdiction over employment in most industries.

They can legislate regarding:

Employment standards: treatment of workers, working hours (overtime, maximums), severance pay, vacation pay, minimum wages

Labour organization: how hard/easy it is for workers to unionize, what unions may bargain over, how disputes are resolved

LOTS of variation across provinces, and over time

Territories are under federal jurisdiction, but many powers have been delegated to territorial governments.

Employment Standards

Exist for all jurisdictions in Canada

Info for BC: http://www.labour.gov.bc.ca/esb/esaguide/

Minimum working age:

Everywhere except Quebec (with parental consent)

Ranges between 14-17 years, 15 in BC

Hard to enforce (e.g., babysitting)

Hours of work:

Limits on maximum hours per day and/or week (everywhere except NB)

BC: if you work more than 8 hours/day or 40 hours/week, you’re entitled to overtime pay

Exception: if you’re on a “flexible work schedule” you’re entitled to overtime pay if you average more than 8 hr/day or 40 hr/week in a “shift cycle”

More employment standards

Overtime pay:

Everywhere

Premium rate of pay for working an “excessive” number of hours in a day or week

BC: 1.5 times hourly wage for time over 8 hours in a day (or 40hrs/week); 2 times hourly wage for time over 12 hours in a day (or 48hrs/week).

Vacation pay:

Relatively recent (since WWII)

All jurisdictions require at least 2 weeks of paid vacation after 1 year of employment (including BC)

BC: (a) after 5 years consecutive employment, entitled to 3 weeks paid vacation

(a) after 5 days employment, employer must pay vacation pay of at least 4% of annual earnings

(b) after 5 years, at least 6%

Even more employment standards

Minimum wages:

All jurisdictions, but LOTS of variation

Lowest: AB & NF (currently $7/hr, text is out of date)

Highest: Nunavut (currently $8.50/hr)

BC has highest rate (currently $8/hr) among provinces, but a low “sub-minimum” at $6/hr for those with no paid work experience (qualify for minimum wage after 500 hours)

Pay equity:

VERY complicated, LOTS of variation

Some places (including BC): “equal pay for substantially similar work”

Other places (federal govt): “equal pay for work of equal value” (to combat occupational segregation)

There are many more: statutory holidays, severance pay, advance notice of termination, maternity leave …

Human Rights

Employment discrimination: “any distinction, preference, or exclusion … which nullifies or impairs equality of opportunity in employment or in conditions of employment” (Drost & Hird)

The Charter of Rights and Freedoms (1982) prohibits employment discrimination on the basis of race, nationality, ethnicity, or place of origin; colour; religion or creed; marital status; physical or mental disability; or gender.

More About Human Rights

Provinces can exempt themselves (via the “notwithstanding clause” in Charter)

Provinces can also add rights.

BC: freedom of political belief, conviction, opinion; sexual orientation; age (only for those 19-65)

Feds/provinces have employment equity laws that

define punishments for violating the Charter, or

define proactive measures to achieve equity along identified dimensions

Today, only the Federal Government and Quebec have mandatory employment equity regulations

ON: voluntary program

QC & feds: all who do business with government must practice employment equity

Other provinces: affirmative action programs

Employment Insurance

Used to be “unemployment insurance”

Introduced in 1935 (very small)

Massively expanded in 1971 (90% of employment covered; receive up to 2/3 of insurable earnings when unemployed; short eligibility, long duration)

Contracted in 1990s

Minimum hours per week & per year to qualify

Benefits reduced to 57% of earnings

Shorter duration

Funded with a payroll tax

Worker pays 2.4% of earnings up to $39,000/year

Employer pays 1.4 times worker amount

Today, only about 1/3 of unemployed get EI

Info: http://www.hrsdc.gc.ca/en/ei/types/special.shtml

Some other legislation

Health and Safety: all jurisdictions

Protect workers

Regulations & government rights to enforce them

Worker’s compensation: all jurisdictions

Compensation for workers that are injured on the job or disabled

by industrial diseases

Financed by employers

Workers give up right to take legal action against employer

Paying for it …

Some benefits are provided by government and paid for through payroll taxes

These are taxes on firms’ total payroll

Usually firms & workers each pay a portion

Federal: Employment Insurance (EI), Canada Pension Plan (SPP)

Provincial: Quebec Pension Plan (QPP), Ontario fair health levy

Some benefits are mandated Minimum wages

Overtime pay

Health and safety

Mandated benefits and the supply of

labour

w

L

S0 the supply curve tells us

the wage that is required to

elicit a given amount of

labour supply

the value to workers of

the benefit is v

workers require a lower wage

to supply the same amount

of labour

labour supply curve shifts

down by $v

S1

v

Mandated benefits and the demand

for labour

w

L

D1

the demand curve tells us

the maximum wage firms will

pay to employ a given amount

of labour

the cost to firms of

the benefit is c

maximum amount firms are

willing to pay falls

labour demand curve shifts

down by $c

D0

c

Effect of mandated benefits on wages

and employment

w

L

S0

S1

v

D0

D1

c

w0

w1

L0

Case 1:Full valuation of benefits

c = v

Employment doesn’t change

Wage falls by full cost of providing benefit

Workers “pay for” benefitTotal value of compensation is unchanged

No real effects

= L1

Effect of mandated benefits on wages

and employment

w

L

S0

S1

v

D0

D1

cw0

w1

L0

Case 2:Inefficient regulation

c > v

Employment falls

Wage falls by more thanvalue of benefit –total compensation falls

Workers are worse offL1

Effect of mandated benefits on wages

and employment

w

L

S0

S1v

D0

D1

c

w0

w1

L0

Case 3:Efficient regulation

c < v

Employment increases

Wage falls by less thanvalue of benefit – totalcompensation increases

Workers are better offL1

Mandated benefit versus government

provision/payroll tax

If all workers are identical, mandated benefit has the same effect as payroll tax/direct governentprovision.

Under mandated benefit, firms pays for benefit.Under payroll tax, firm pays tax to government, who pays for benefit.

Same effects in either case.

When workers are heterogeneous

Assume:

• Value of benefit to worker is the same whether mandated or provided by government

• Two types of workers: Type 1 is more likely to claim benefit than Type 2 (eg employment insurance, maternity benefit)

• Value of the benefit to Type 1 is v1

• Value of benefit to Type 1 is v2

• v1 > v2 (because Type 1 more likely to claim)

• Firms must pay all their employees the same wage (pay equity legislation)

Heterogeneous workers

Under a mandated benefit:

• the cost to firms depends on the number of benefit claims among the firms’ employees – depends on the proportion of employees who are Type 1 and Type 2

• Some firms pay wlow and hire Type 1 workers who have lots of benefits claims• Some firms pay whigh > wlow and hire Type 2 workers who have very few benefits claims

• Type 1 workers prefer high wage firms, but can’t get hired by them (because firms don’t want to pay for the benefits claims)

Heterogeneous workers

Results for mandated benefits:

• some firms pay high wages and some firms pay low wages

to workers that are equally productive

• high wage firms refuse to hire workers with observable characteristics that are associated with greater frequency of claims

• sorting across firms (eg women concentrated in low-wage firms and men in high wage firms)

In what sense is this discrimination?

Heterogeneous workers

Under government provision/payroll tax:

• the cost to firms depends on the total number of employees, not on the mix of Type 1 and Type 2 workers

• wages will be the same in all firms• no firms will discriminate against Type 1 workers

• Type 1 workers are better off than Type 2 workers because they get the same wage, plus they get a benefit that they value more

Heterogeneous workers

Results for government provision/payroll tax

Tax/benefit policy causes total value of compensation to Type 1 workers to increase

Tax/benefit policy causes total value of compensation to Type 2 workers to fall

These kinds of benefit programs redistributefrom one group to the other.

Unions

Before employment standards were enacted, workers relied on group pressure (mostly from unions) to improve working conditions

Rights & procedures to organize highly regulated

Today, about 30% of workers are union members (73% of public sector, 18% of private sector)

Education, public administration, and healthcare industries are highly unionised (>50%)

Agriculture, professional & scientific services, accommodation/food services, and finance/insurance/real estate have very low union density (<10%)

In 1960’s, 80% percent of union workers were men.

Now, about 50/50

NF has highest density (38%), AB lowest (23%)