A left turn on the road to Rome

At 6.1 per cent, Canada's unemployment rate is at the lowest level since 1974.

How do we explain this happy result?

The standard view among economists is that the decline in Canadian unemployment over the past decade is due to “tough love” labour-market policies implemented during this period. Deep cutbacks in unemployment insurance. Deeper cutbacks in welfare. A decidedly anti-union tilt in labour law. A general cultural shift emphasizing the “survival of the fittest.”

Traditional economics holds that a less regulated, more “flexible” labour market — freed from well-meaning but counterproductive government interference — will automatically find a better match between supply and demand, and hence reduce unemployment.

This general view was roundly endorsed by the high priests of the Organization for Economic Co-operation and Development in their epochal 1994 Jobs Strategy. This report was a ringing endorsement of labour market “deregulation” and served as a manifesto for the subsequent, painful re-engineering of social programs in many industrialized countries.

At that time, Canada's economy was battered by a recession, mass plant closures, stubborn unemployment and burgeoning costs for UI and other social programs. So the OECD report found a receptive and willing audience among Canadian officials. Not only did it lay out (in highly prescriptive detail) a seeming solution to Canada's unemployment, better yet, the OECD's recipe would save fiscally challenged governments billions of dollars.

The rest, as they say, is labour market history. Canada's unemployment insurance program was renamed (to Employment Insurance), and its overall generosity was cut in half. Today, only 45 per cent of unemployed Canadians qualify for any EI benefits whatsoever. And other punitive measures reinforced the market-friendly direction. A decade later, this approach would seem to be vindicated by the low unemployment rate.

But hold on. Just as advocates of the flexible labour market bask in the glory, along comes the OECD to admit its theory wasn't quite right after all. A country does not, in fact, have to impose the “law of the jungle” to reduce unemployment.

At a recent conference of labour ministers in Toronto, the OECD presented new empirical evidence showing there is no overall correlation between free-market labour policies and low unemployment. The OECD was here to release its New Jobs Strategy: a somewhat kinder, gentler approach that now concedes that strong social protections are not incompatible with efficient, high-employment labour markets.

In particular, the OECD's new research puts to rest three old bugbears regarding the impact of labour regulations on unemployment. It admits that minimum wages, unions, and employment protection laws have no visible impact whatsoever on unemployment. Moreover, two features of labour policies in many European countries — hefty spending on active labour policies (like retraining) and co-ordinated collective bargaining mechanisms — are found to strongly reduce unemployment.

John Martin, the OECD's chief labour expert, put it this way: “There is more than one road to Rome.” (Actually, given Italy's painful 10 per cent unemployment rate, Rome is not the destination we have in mind.) The OECD report acknowledged that several “market-reliant” countries (including Canada and the U.S.) had successfully raised employment levels (although in Canada's case, this was mostly due to improved macroeconomic conditions, not changes in labour policy).

But another very different group of countries (including Ireland, the Netherlands, Austria and Scandinavia) has been even more successful in generating very high employment rates. Thus the OECD is forced to abandon its former advocacy of U.S.-style labour policies as the solution for unemployment. Instead, it now offers a more nuanced view: “There is no single combination of policies and institutions to achieve and maintain good labour-market performance.”

Once again, the OECD's directive comes at an opportune time in Canada. We are at a point in history when we can worry less about the quantity of jobs, and more about improving the quality of jobs — and the quality of life for those who do them. The OECD's evidence indicates that measures aimed at boosting wages and employment security do not cause unemployment. Indeed, when paired with other policies (like aggressive training programs), they can be more effective than the “free market” at ensuring that workers are matched efficiently (and happily) with work.

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