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Finlayson Op-Ed: Workers’ bargaining power to rise as labour shortages proliferate (Business in Vancouver)

The critical role of skills in a modern economy and the fact that many employers continue to report difficulties in finding qualified personnel raise questions about the future supply of workers.  A number of business leaders have voiced alarm about current and/or potential labour shortfalls. Some worry that the overall economy could be de-railed by widespread shortages of workers.

In thinking about this topic, it is useful to begin by considering the larger economic picture and the lessons from past experience.  Concerns about labour shortages are not new, tending to wax and wane with the state of the economy.  Temporary labour supply-demand imbalances in particular occupations, regions, or industries are not uncommon.  But as an empirical matter, serious and persistent shortages of workers have been rare in Canada.  The reason is that the emergence of imbalances in parts of the labour market typically leads to institutional, behavioral and policy responses that, over time, serve to eliminate or mitigate the effects of shortfalls in the supply of workers.  If an economy or an industry has too few qualified workers, normal market forces should lead to one or more of the following outcomes:

  • Relative compensation levels rise for those with scarce skills, encouraging more people to acquire the necessary qualifications and training to work in occupations facing shortages.
  • Education and training institutions modify programs and add capacity in high-demand fields.
  • Employers step up recruitment, retention and human resource development efforts targeted at building sought-after skills.
  • Companies alter their production processes to reduce the need for labour, often by substituting capital and technology or out-sourcing tasks to lower-cost suppliers located elsewhere.
  • Governments also respond when the job market tightens, e.g., by boosting immigration levels, tweaking entry criteria for new immigrants, reforming retirement policies, or allocating more resources to education and training in areas where labour demand/supply gaps exist or are projected.

In order for there to be a long-lasting shortage of skills, something must interfere with or retard the normal market-driven economic, policy and institutional adjustment mechanisms.  For example, young people may shun certain occupations or industries, even if they appear to offer attractive job and career opportunities.  Perhaps the K-12 school system doesn’t equip graduates with the skills and aptitudes they need to fill vacant positions or to pursue post-secondary education and training.  Universities and colleges can be slow to add new spaces in fast-growing fields due to cumbersome decision-making processes and the difficulties of shifting institutional resources away from low-demand programs.  More generally, many young people, parents and high school counsellors lack relevant and reliable information on job market and employment trends – a problem the B.C. government is trying to address with its “workbc” web site (www.workbc.ca).  For all of these reasons, fixing skill shortages can be a protracted exercise, provoking frustration among employers anxious to meet their staffing needs.

Still, most economists believe that as time passes skill shortages should largely self-correct, including via adjustments in employee wages, as well as through the other mechanisms outlined above.  Here is where the perspective of the economist may differ from that of a manager or entrepreneur.  Many business people are reluctant to acknowledge that pay increases may be a key part of any strategy to ameliorate shortfalls in the supply of workers.  Yet this is exactly what we would expect in a market economy that relies on the “price system” to bring supply and demand into equilibrium for goods, services, raw materials, and other factors of production that companies rely on to run their operations.  In the labour market context, wages/benefits play a role analogous to that of prices in other markets.     

The job market in B.C. is expected to tighten as demographic changes work their way through the economy.  By next year the province will reach a “tipping point,” as the ranks of aging baby boomers leaving the workforce exceed the number of young people entering it.  In a world of greater labour scarcity, we can anticipate gradual upward pressure on wages, including in industries with lots of relatively low-paying, entry-level jobs.  The economy as a whole will continue to function and shouldn’t be crippled by proliferating labour shortages.  But in many industry sectors, the bargaining power of workers is likely to increase relative to that of employers.  After a long period in which the bargaining dynamic has generally moved the other way, that might not be a bad thing.  

By Jock Finlayson, Executive Vice President and Chief Policy Officer, Business Council of British Columbia

As published in Business in Vancouver