Melting Newfoundland’s Tuition Freeze

Recent comments by the Auditor General of Newfoundland and Labrador have sparked debate throughout the province surrounding public investment in post-secondary education. Specifically, the Auditor General suggested the need to review the existing tuition freeze and evaluate whether it has been effective. By considering the high costs of the tuition freeze and the lack of significant benefits, however, it is clear that ensuring fairness for provincial taxpayers requires some form of change. Thus, the provincial government should consider removing the tuition freeze in the upcoming provincial budget.

In 2001, the Government of Newfoundland and Labrador announced a program to freeze tuition in an effort to keep post-secondary education affordable in the province and encourage enrolment. This program focused primarily on increasing core funding to two post-secondary institutions in the province, namely College of the North Atlantic (CNA) and Memorial University of Newfoundland (MUN), including spending over $282 million since 2005. Further, tuition was lowered every year from 2002 to 2005 for a total decrease of 22.7 per cent at the cost of over $50 million. Now, provincial tuition rates are second only to Quebec for affordability, yet the question remains: has this investment been worth it?

To consider whether it has been, it is important to evaluate how effective the tuition freeze has been in meeting the goals that the policy was to address. The provincial government implemented a tuition freeze for two reasons: 1) encouraging university enrolment in a province that has an ageing population and substantial outmigration in the last half-century and 2) helping ensure that post-secondary education for residents of the province is affordable. An appeal to the evidence, however, shows that this policy has not effectively met these goals.

While there are serious demographic issues set to face the province over the coming decade, including severe labour shortages due to a lack of young skilled workers in an ageing workforce, the tuition freeze has not been successful in attracting skilled young people to enrol in provincial institutions or to stay in the province after graduation. Instead, we have seen increased enrolment from out-of-province Canadian students who pay the same discounted rate. Out of province enrolment has increased by 64 per cent, however, less than half of them (43 per cent) are staying in the province after graduation to work and live. Further, enrolment for provincial residents has actually decreased by 13 per cent in the same period. This development should signal to the provincial government that the policy is not working. It also shows massive inequity for provincial taxpayers who subsidize students from other provinces to earn a post-secondary education.

Furthermore, while the tuition freeze was put in place to ensure that provincial residents can afford to earn a post-secondary education, the existing policy ignores recent reforms made to the provincial student aid program that already ensures this possibility. Over the last decade, the Government of Newfoundland and Labrador has invested over a $100 million in their existing student aid program and has modified the program criteria to ensure more students are able to access Student Aid services. Most notably, the Government has announced the conversion of provincial student loans to non-repayable grants to take effect this fall. These reforms have significantly reduced the barriers for provincial residents to earn a post-secondary education and would continue to assist students in earning an education without the continued implementation of a tuition freeze.

As indicated in my last blog post, faltering oil prices means severe consequences for the government of Newfoundland and Labrador and illustrates a need to curb spending in risk of a near-billion dollar deficit. By cutting the tuition freeze, Newfoundlanders and Labradoreans would no longer be subsidizing the tuition rates of out-of-province students, nor be on the hook for an ineffective public policy.

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

Envisioning a Better Rural Transportation System

Consider this hypothetical scenario: a very successful company has grown to the point where its consumer base is roughly 100,000, but due to mismanagement, evolving technology, and changes in consumer preferences, that company’s consumer base drops almost 75 per cent to 25,000. As a stakeholder, should you continue to invest in the company to appease a small cohort of loyal consumers, cut your losses, or revamp the business model? Depending on the situation, the latter two options seem to be the most feasible.

In this instance, we are talking Transit Cape Breton.

During its peak, Transit Cape Breton had a ridership of 1.25 million, which has dropped to 320,000 in 2013. Annually, it receives $3 million from the CBRM, however, planned cuts will push that number down to $2.3 million. Predictably, there has been an outcry from the community, mostly from seniors, the unemployed, and the disabled. The largest criticism has come from proposed route reductions and the implementation of a single fare.

Government-funded mass transit is a classic example of the information problem, and to a certain extent the public goods problem. In this case, government is unable to assess accurately the need for transit. Moreover, deciding how, where, and when to provide a service is a political process that results in low-quality, inefficient outcomes. These inefficiencies, however, do not indicate that Cape Breton should not have a transit system–public or otherwise; it indicates the need to revisit the business model and adapt it to the omnipresent “rural disease”–an outflow of young skilled workers, an increase in the amount of seniors, and a deficit of economic development.

There are several ways, however, that the CBRM could develop a profitable transit service.

The addition of smart card passes should be a priority. Reloading them is effortless and they would benefit seniors. Moreover, Transit Cape Breton should engage with the Cape Breton University Student Union and begin negotiating a student transit plan. In Kingston, Ontario, the Alma Mater Society (AMS) at Queen’s University charges students a mandatory $46.50 for an 8-month bus pass. Transit Kingston’s largest source of revenue is the deal they have with the AMS. According to the 2011 Transit System Review Report, a majority of ridership attends the university. The report recommends rearranging routes, zoning, and transit fares to reflect this fact.

Secondly, the municipal government has taken a respectable stance on cutting routes that have low ridership–obviously the government cannot commit limited resources to an area with very low ridership at the expense of high volume zones. However, there are ways in which the government can replicate that service through promoting private enterprise or creative resource allocation. In Richmond County, Nova Scotia, the transit system, albeit a very small one, is a non-profit community based transit line. Facilitating the creation of something similar in communities such as North Sydney, Sydney Mines, Glace Bay, and some areas of Sydney would be beneficial. Additionally, the CBRM could use school busses when they are not in use to serve low volume routes.

Lastly, the CBRM should consider partly- or fully-privatizing transit on Cape Breton Island. The United Kingdom privatized transit in 1985, which resulted in lower costs through increased productivity and employment cuts. York Transit, GO Transit, and Phoenix Arizona have contracted out certain portions of their transit, saving $2 million annually. In Cape Breton, contracting small busses to service low volume routes or amending by-laws to allow independent operators to run certain routes should be an option.

These are only some policy options the CBRM can pursue and most of them have a proven track-record of cost reduction and service improvement. What we can say for sure though is that Transit Cape Breton is in need of a massive overhaul.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Strike Signaling and the UNB Negotiations

In light of the University of New Brunswick’s (UNB) strike, I present a model for common information signaling between unions and firms during wage bargaining.

In order for a sustainable hiring of labour to take place, wages must fall in between a certain window. The lower end is defined by the value a worker places on his own time and effort. The employee’s value to the company, i.e. his marginal product, is on the higher end. Paying employees the actual value of their marginal product would imply that profits are near zero. Similarly, paying employees close to their own lower limit encourages them to quit.

During wage negotiations, unions and firms engage in a great deal of signaling. They make claims about their willingness to work or the financial situation of the company in order to define clearly the negotiation window. An employee’s willingness to work is usually a combination of his job satisfaction, coupled with the wage he receives. To this extent, workers, or their unions, have an incentive to claim that their minimum acceptable wage is high, even if it is not. This is a form of information signaling to the firm regarding the willingness of employees to work under the given circumstances.

From the firm’s perspective, the ability to provide wage increases for its employees depends on how the marginal product of each worker relates to their wages. This correlates closely with the firm’s profit margin. In other words, a positive profit margin typically indicates a gap between wages paid and the cumulative marginal product of the company’s workforce, therefore indicating that there is room for negotiating a wage increase.

To complicate things, both sides have an incentive to conceal their true position, so they rarely trust one another’s information. The firm assumes that the union is exaggerating working conditions and job satisfaction, while the union assumes that the firm underreports their financial health and profitability. This is the rationale behind strikes and lockouts.

The basic idea behind strikes and lockouts is that it forces each party to reveal their position and preferences. Strikes delay production, reducing both revenue and remuneration. Therefore, the mindset of the union is as follows: “If you really need to resist wage increases, then you should prove your position by hurting yourself first.” Similarly, a firm-induced lockout signals that, “If wage increases are really that important to you, you are probably willing to be locked out to secure them.” This back-and-forth signaling reveals their true preferences, which both parties observe via workers’ continued willingness, or unwillingness, to strike, in addition to the firm’s continued commitment to a lockout.

When both parties acquire enough information, their true negotiation windows become clear and they can reach a conclusion. In the case of the UNB strike, the negotiation window appears quite large, with the Association of University of New Brunswick Teachers (AUNBT) requesting a 26 per cent wage increase, among other demands. At the same time, UNB claims that it is in rough financial shape, suggesting that there a divide between both parties–the negotiation window is quite large. Concordantly, this standoff may take longer than expected to draw out the true preferences of both the AUNBT and UNB.

Mike Craig 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