Unproductive Unionization: Labour and the Economy in Nova Scotia

The 2012 winter in Halifax was particularly bad, but not necessarily because it was cold. Instead, public transit workers engaged in strike action that lasted for six weeks in the middle of the winter and, despite earning much more than the average Canadian, demanded higher wages and better bonuses.

Public transportation is popular among students and low-income individuals who rely on it as a means of getting them to school or work and the strike displaced those riders. Once the strike ended, the Chronicle Herald conducted a survey and found that 42 per cent of voters were “still pretty angry” about the strike action, particularly because they felt that the strike demands were preposterous. (For example, the average salary of an HRM bus driver is $22/hour or $40,000, which is roughly 20-25 per cent higher than the median Canadian salary). The strike ended with a five-year renewal contract for $5.6 million ending in 2017, but there is chance that another strike will occur in the winter of that year.

Similarly, there have been several labour demonstrations and protests from the Nova Scotia Government and General Employees Union (NSGGE) and other unions representing the province’s healthcare sector, whom the essential services legislation–Bill 1 or the Healthcare Authorities Act–affected. These campaigners popularize their cause to gain support from the public by using emotional appeals such as “removing worker rights to strike = healthcare shortages.”

In the last few decades, union popularity has waned in the United States and to some extent in Canada, too, however, in Atlantic Canada, unions remain a powerful political force. In 2012, for instance, the Fraser Institute released a report on labour markets titled “Measuring Labour Markets in Canada and the United States,” which found that average unionized employment is 30 per cent in Nova Scotia and 39 per cent in Newfoundland and Labrador. (One of the reasons that report cited for these rates was the increase in public sector employment.)

Several studies show that unionization may discourage productivity rates, reduce employment prospects for new labour market entrants, and lower profits for private firms, the latter of which can affect business optimism. Economist Barry Hirsch, for instance, found that “market value and earnings [of firms] are estimated to be about 10-15 per cent lower in an average unionized company than in a nonunionized company, following extensive control for firm and industry characteristics” in his paper “Union Coverage and Profitability Among US Firms.” Furthermore, Tony Fang and John Heyword found that “the share of a plant’s workers covered by collective bargaining has a robust positive partial correlation with the probability of larger plants closing” in their paper “Unionization and Plant Closure in Canada.”

Removing worker rights in Nova Scotia does not cause healthcare shortages, but, rather, rigid government regulation that determines how many doctors and nurses to produce annually in the province does.  In fact, in many respects, there might be a correlation between union strength and labour shortages because those groups often restrict entry into a given sector. Moreover, affording employers the right to discard inefficient employees and hire more efficient replacements is a key component of building a dynamic labour market.

On the contrary, unionization can sometimes hinder labour market flexibility, as demonstrated in “Unionization and Input Flexibility in US Manufacturing, 1973-1996.” Ultimately, whereas some unions do protect worker rights, it is slightly misleading to argue that they protect the rights of every worker. Therefore, using that argument to gain public support can be deceptive. As economist Friedrich Hayek wrote, “It is one of the saddest spectacles of our time to see a great democratic movement support a policy that must lead to the destruction of democracy and that, meanwhile, can benefit only a minority of the masses who support it.”

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Lessons from the Rock: Oil Revenue, Government Spending, and Public Debt

Newfoundland and Labrador has experienced tremendous economic growth in the last decade. GDP per capita, for instance, has increased significantly and is currently above the national average, personal earnings are at record-high levels, and most importantly, the province is no longer a “have-not” province under the federal equalization programme.

Largely thanks to booming oil production, Newfoundland and Labrador has set a benchmark for short-term economic growth. Yet, with oil prices plummeting, the provincial government has implemented a freeze on discretionary spending and placed additional restrictions on public sector hiring. Given the recent expansion of the province’s public sector, however, it is important to consider whether spending restraint is achievable, or whether the provincial government’s decision is simply too little, and too late.

nl public sector employment

In the past ten years, oil revenues have been a major staple of the province’s budget. The most recent budget, for instance, projected offshore royalties to bring in $2.4 billion, representing roughly 36.45 per cent of total projected revenue. Equipped with this enlarged, volatile revenue source, however, the government has continuously increased spending, rather than having enacted measures to improve the province’s position in the long-run, such as paying down the province’s public debt or creating a savings fund.

Between 2005 and 2011, for example, public sector employment increased by nearly 8,000 jobs–17 per cent in six years, which is a rate much larger than that of private sector job growth during the same period. Since 2010, however, offshore royalties have fallen and forecasts suggest a steady decline over the next twenty years. Ebbing royalty flows stem from the end of federalization equalization payments, as per the Atlantic Accord, and the falling value of oil production.

This combination of increased spending and faltering offshore revenues spell fiscal trouble for Newfoundland and Labrador. It is, therefore, important for the government to consider important cuts to the public service to ensure sustainability, lest the provincial government compound the public debt.

If recent history is any indication, it is unlikely that the provincial government will pursue substantive reforms. Instead, projected expenditures are set to increase in the next decade. But with oil prices hovering roughly $40 lower than the budgeted $105 USD per barrel, fiscal consolidation is highly important.

The government attempted to curb spending in 2013 by cutting nearly 1,200 public sector jobs, implementing a long-term public sector hiring freeze, and announcing plans to conduct an efficiency review of postsecondary institutions. But after public backlash, the provincial government reversed many of these decisions, such as lifting the hiring freeze. The efficiency review was also never completed. In fact, the most recent provincial budget features rising expenditures, adding $808 million to existing net debt.

Of course, cutting the public sector is politically sensitive and it requires serious deliberation, but if the provincial government chooses to base spending on volatile revenue sources, it also needs to cut expenditures when receipts fall. These jobs would be lost in the short-run, but in the long-run, consolidating the province’s fiscal situation will lower the public debt burden and consequent spinoff effects will provide benefits for every resident of the province.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

The economic and moral benefits of ending Canada’s postal monopoly

Currently, Canada Post holds a monopoly on the delivery of first-class mail in Canada. The Canada Post Corporation Act affords it the “sole and exclusive privilege of collecting, transmitting, and delivering letters” within the country. Exceptions to this rule are limited.

There are several economic reasons for liberalizing postage in Canada by ending the Crown corporation’s monopoly. Since they are sheltered from market competition, for instance, monopolists can raise prices higher than firms in a competitive market could. The firm’s additional revenue stemming from its unique ability to participate in its market is termed monopoly rents. These rents reflect the difference between the firm’s prices and opportunity costs, which tend to converge in competitive markets as companies undercut each other until the process becomes unprofitable.

Sensing this advantage–that is, the ability to extract additional rents via monopoly status–unions typically bargain for some portion of these rents in the form of higher wages, favourable working conditions, and so forth. Nevertheless, this increases the firm’s costs.

Canada Post faces a difficult financial position because it allowed unions to absorb these rents. However, the emergence of newer, more efficient technologies eroded its ability to sustain higher levels of worker compensation. It manages these hardships by reducing costs by diminishing services, which has the counterproductive effect of exacerbating declining demand for its product. For instance, it announced plans to end mail delivery to urban homeowners and it has increased its stamp prices to offset its financial difficulties.

Importantly, though, Canada Post has the ability to impose these reforms only because consumers do not have a viable alternative for first-class mail delivery and other essential postal services.

By opening the postage market to competition, firms would need either to offer services closer to cost or offer better service than their competitors. Theory suggests, and empirics confirm, that liberal reforms in would reduce prices and increase the amount of options available to consumers, which, in the case of Austria, the Netherlands, and Germany–countries that liberalized their postal markets–is true.

Proponents of Canada Post’s monopoly suggest that it provides equal rates across the country, which allows the outfit to provide “affordable mail service” to rural Canadians. Yet, it is not entirely certain that competing firms could not offer cheaper rates in these areas than Canada Post. Furthermore, it is not necessarily clear why the postage industry has an obligation to equalize rural and urban Canada in the first place.

The monopoly on mail service in Canada also adversely affects free speech. In early March 2014, Canada Post apologized for delivering offensive pamphlets prepared by the People’s Gospel Hour to thousands of Labradorians. The mail-outs quoted the Bible in an attack against homosexuality. These situations raise an ethical dilemma about Canada Post’s ability to act as both a conduit of Canadian values and a service-provider.

Canada Post is a crown corporation chartered by the Canadian government, which promotes certain values and, therefore, it cannot sensibly deliver mail that is questionable in content. Conversely, it is the only firm permitted to deliver certain documents and packages and it cannot refuse certain mailing orders without violating freedom of speech (at least theoretically).

Ending the mail monopoly, and thereby allowing private individuals and firms to deliver letters, would solve this quandary – neither Ottawa, nor Canada Post, would have to implicitly support the dispersion of bigoted materials in order to safeguard freedom of speech and censored groups could seek alternative options for delivering said material. In other words, Canada Post employees would not be the ultimate arbiters of what is “acceptable” for delivery.

In any case, Canada Post’s monopoly is both uneconomical and ethically challenged, and allowing competitive forces to govern the Canadian postal market is a viable alternative. Unlike the current structure, for instance, private competition could allow for better quality and more affordable service, not to mention that, most importantly, it would quash concerns about the government’s role in deciding between decency and free speech.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute