How to get ahead in think-tanking

A new jobs study has Jason Kenney intrigued. Mike Moffatt explains why it’s wrong

Do labour shortages exist in Canada? The question came up in a high-profile report from the Fraser Institute. Despite the attention, the paper brings us no closer to an answer, largely because it fails to understand the question. But its author, Philip Cross, seems quite certain a shortage exists and that the kids are to blame.

In order to determine if labour shortages exist in Canada, we must first decide what constitutes a labour shortage. Unfortunately, Cross does not define the term. In precise economic terms, “shortage” applies specifically to “[a] condition in the market in which the quantity demanded is greater than the quantity supplied at the existing price.” For the sake of clarity, check out my sketch of what a shortage would look like in the traditional Economics 101 framework:

demandsupply2

In such a framework, the economist would need to be rather explicit about how she defines “market” (fast-food workers in Lake Wobegon, for example), “quantity” (that is, number of workers, total hours worked, and so on) and “price” (hourly wage, yearly salary, yearly salary plus benefits, etc.).

In this framework, a shortage exists when the existing price is below the price needed to match the quantity demanded with the quantity supplied. There must be some mechanism preventing prices from adjusting to eliminate the shortage, with the two most common ones being government regulation (rent controls are a classic example) or some form of market failure.

It’s difficult to tell what Cross means by “shortage.” On page 3 of the paper, he does examine the role wages (prices) play in labour shortages:

The final puzzle is why wage increases have not accelerated as incipient shortages threaten. Part of the answer is the weight of central Canada’s weak labour markets in the national statistics, which hide a clear acceleration of wages in some provinces and industries. As well, employers face a dilemma: If they boost wages to attract new workers, they will have to raise wages for their incumbent labour force.

The first part of the answer roughly states that markets are working, shortages are being reduced, if not eliminated, but this is masked somewhat by national data. If true, why worry about labour shortages?

The second part is more interesting. Cross believes firms are unable to offer potential hires enough money, as this would force employers to raise wages for existing workers, thus preventing the labour shortage from closing. Unfortunately, the paper does not provide any evidence that this is responsible for labour shortages. It does suggest these shortages may linger, as “these employment outcomes have not persisted long enough to change earnings.”

I was surprised to see references to slowly adjusting labour markets in a Fraser Institute paper. The concept Cross discusses of  ”sticky wages” underlies most of New Keynesian economics. Naturally, the paper does not go on to suggest standard New Keynesian policy responses to the problem, but at least acknowledging the issue is a level of ideological diversity that is unexpected from the institute.

Not only does the paper not provide any New Keynesian remedies, it does not provide any suggestions at all that could be used to rectify this market failure. However, I am basing my interpretation of the problem on my best guess as to what Cross means by “labour shortage,” a concept he never explicitly defines. Of course, Cross is welcome to define the term however he likes in his paper, but if he is defining “shortage” some other way, he should inform the reader.

Cross describes how wages are going up in parts of the country, with nominal average hourly earnings rising nearly twice as fast in Newfoundland, Saskatchewan and Alberta as in Canada. The report believes this is indicative of something, though I’m not sure what:

The growing gap between wages in Newfoundland, Saskatchewan, and Alberta and the rest of the country reflects how efforts to increase the supply of labour in these provinces have not been sufficient to stem the rising pressure on wages, a classic symptom of how the labour market signals shortages.

A simple explanation for the wage increases is that the demand for labour in some regions has increased, pushing up rates (as well as the quantity supplied of labour), which is the sign of a well-functioning market, not of shortages. Unless we have a pool of idle workers at home, the price of labour—like the price of anything—should rise when demand increases. If the definition of “shortage” is simply rising prices, then our economy is rife with shortages. I’m not ready to declare a fruit shortage every time the price of oranges goes up a penny, though.

Cross provides data that shows some Alberta companies are dealing with the increased demand for labour by having existing employees work more hours, though no context is given that would suggest this is materially different than previous economic booms. But there are problems with this approach:

Squeezing more hours out of workers is a short-term fix to labour shortages for some employers. However, they are likely to view it as an unsustainable solution, especially the very long hours worked by people over 55 years old and multiple job holders working more than 50 hours a week.

If this approach is unsustainable, then might it not sort itself out? Won’t employers have to hire younger workers to replace them? Not necessarily, argues the report, because too many young people are going to university rather than community college:

The reason why youths are reluctant to pursue their studies at community colleges instead of universities is unclear. It could reflect that they are receiving poor information about labour market outcomes. They could also be making poor decisions, because they are influenced by the mantra in our society that a university education is the ticket to better jobs and incomes.

Cross provides thin evidence to support his thesis that students are enrolling in the wrong programs. First, there is data on employment rates (the percentage of people with a job):

The employment rate for youths who graduate from high school and then acquire a certificate or diploma is 77.2 per cent, versus 71.8 per cent for university graduates.

This may be meaningful, but, without any controls, it is impossible to tell. Men have significantly higher employment rates than do women for a variety of reasons. If women make up a higher percentage of university graduates, then this fails to be an apples-to-apples comparison. What ultimately matters is how the decision to go to college versus university affects the employment opportunities. Choosing to go to university over college will change many things for a 19-year-old male, but gender is not likely to be one of them!

Unemployment-rate data is also cited, with the youth unemployment rate for 15- to 24-year-olds cited for various groups: post-secondary certificate or diploma and high school (7.8 per cent), bachelor’s degree (nine per cent) and above a bachelor’s degree (9.4 per cent). But this is not an apples-to-apples comparison, since a bachelor’s degree often takes longer to obtain, making the graduates skew older. A 23-year-old with a certificate may have had two or three years to either find a job or drop out of the labour market (and, thus, not be counted as unemployed), whereas someone with a bachelor’s degree has likely just graduated and is looking for his first job. If we instead consider those 24 or older, we find those with B.A.s have the lowest levels of unemployment.

If demand for post-secondary certificate/diploma holders was rising significantly, we should expect to see their wages rise while wages in the over-saturated bachelor’s market fall. But, as Cross notes, “the relatively higher earnings for university graduates has not eroded significantly.”

In his conclusion, Cross declares that “Canada does not suffer from the need ‘to collect more and better data’ to answer some of the questions related to whether shortages exist.” It’s true, if we’re content to answer vague and ill-defined questions by making apples-to-oranges comparisons using raw data with no controls. Then, what we have is more than sufficient.




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How to get ahead in think-tanking

  1. There are currently lots of unemployed guys, high school or less, with 20 years in, who used to work on the line at car plants. They have mortgages and families.
    What other jobs do you think they can do?

    Meantime we have thousands of biotechnology jobs [for example] available. Unfortunately we’re promoting education for jobs like plumbing.

    And Jason wants to bring in ‘foreign nationals’ to do the top jobs…..but none to do the pouring of coffee and serving of donuts.

    In the old economy, workers were plug-in parts. Lose a job at Factory X, go down the street to Factory Y….but that doesn’t work anymore. People and numbers are quite different things.

    There are now people in Canada, in mid-life, who will never work again. For them it’s over with.

    The UK now has a quarter of a million households where no one in living memory has held a job.

    • If cars were cheaper, more people could buy them and employ more to make them. #1 cost in Canadian society is taxes, hidden and real. Drives up costs and fewer can afford it.

      Send Alberta and Saskatchewan plumbers, HD mechanics, welders, millwrights, roofers, other productive professions, we have jobs. Problem is eveyrone gets a fluffy degree in sexology, basket weaving, BA, M(ore)BA, teachers and consumption degrees, they are a dime a dozen. A cushy teachers job comes up, 200+ apply.

      But hey, we are a tax inflated economy, and as government consumption increases, there will be less non-govmint jobs and a lower standard of living. People with less value money, with ultra high taxes hidden and real, are going to get less goods and services, and that means less jobs.

      Jobs come from affordable exchange of goods and services. Government can’t solve the problems as allt hey are doing is tax/debt for less affordable.

      Its why I invested offshore, outside of G7 debt/bankrupt nations. In terms of devalued CAD money, I made over 25% ROI in 8 months…only wish I sent more offshore.

  2. But.. but .. in Lake Wobegon all the kids are above average !

  3. Philip Cross responds:
    I would like to correct some erroneous impressions left by Prof Moffatt’s column on my study of labour shortages. First, I do not write only for the Fraser Institute. In the past year, I have published work with over a half dozen think tanks in Canada. Nor do I only publish in think tanks; I have two articles forthcoming with academics unrelated to think tanks.

    Second, the concept of shortages might not be precisely defined to suit the taste of academics, but that does not mean it does not carry great significance in public discourse and in policymaking. That is why the Bank of Canada in its quarterly survey of business conditions asks firms if they are experiencing labour shortages, without defining precisely what it means by shortages.

    Prof Moffatt seems surprised that work published by the Fraser Institute allows for the possibility that markets do not adjust instantaneously to changing conditions. Think tanks and policymakers, unlike some academics, have to live in the real world. A world which adjusts at varying speeds to constantly changing conditions, leaving the possibility of surpluses of university graduates in some fields and shortages of labour in others.

    Regards, Philip Cross.

    • I would in turn like to correct Phillip Cross.

      Mike Moffatt is not a Professor, capital ‘P’.

    • Just read your report Philip. For the most part, I agree with your annoyance associated with academic economists. One would think that a field with such a poor track record of prediction would inspire a little more humility in its practitioners.

      That said, on page 13 you describe how vacancy measurement is not really relevant to assessing the existence of a labour shortage, with some rather weak justifications around dysfunctional employment practices. It was even more surprising that in your recommendations you suggest that government adopt policies to address labour shortages in the absence of job vacancies. As a tax payer I am offended by the suggestion that government should do anything to assist an industry which cannot be bothered to post vacancies.

    • Since Philip Cross was gracious enough to respond to my piece, I felt that I should respond to his response. Here goes:

      “I would like to correct some erroneous impressions left by Prof Moffatt’s column on my study of labour shortages. First, I do not write only for the Fraser Institute. In the past year, I have published work with over a half dozen think tanks in Canada. Nor do I only publish in think tanks; I have two articles forthcoming with academics unrelated to think tanks.”

      Nobody is questioning your (impressive) CV. However, I fail to see how any of that is relevant to my critique of your piece.

      “Second, the concept of shortages might not be precisely defined to suit the taste of academics, but that does not mean it does not carry great significance in public discourse and in policymaking. ”

      The critique was that you have not defined it at all, not that your definition was imprecise. Specifically, how do you define what a shortage is, and how do you measure one?

      “That is why the Bank of Canada in its quarterly survey of business conditions asks firms if they are experiencing labour shortages, without defining precisely what it means by shortages.”

      Which makes sense, since the BoC is measuring perceptions. For example, various agencies will poll the public on perceptions of inflation. But when the Bank goes to measure inflation, it has a definition of “inflation” that it uses.

      “Prof Moffatt seems surprised that work published by the Fraser Institute allows for the possibility that markets do not adjust instantaneously to changing conditions. Think tanks and policymakers, unlike some academics, have to live in the real world.”

      Three points about this:

      1. I have never been a fan of the “real world” talking point, as it is one designed to silence debate, not promote it. I believe that if someone is curious about the world and is willing to talk to people and ask questions, they can learn a great deal regardless of which “world” they inhabit. If someone is incurious, they’ll learn little regardless of where they sit.

      2. In the past I have heard the “real world” talking point, it specifically excluded “think tanks and policymakers” in favour of private sector industry work, but perhaps Tunney’s Pasture has changed a great deal since I last visited.

      3. A 3-second Google search brings you to my LinkedIn page: http://www.linkedin.com/in/mikepmoffatt, where you will discover that I’ve worked in the private sector for the last 9 years as a consultant to the chemical industry. I co-founded the company I work for, Nexreg Compliance, and am the guy who is in charge of making payroll each month. We have over 500 clients in two dozen countries, which we serve from our head office in London, ON.

      “A world which adjusts at varying speeds to constantly changing conditions, leaving the possibility of surpluses of university graduates in some fields and shortages of labour in others.”

      Nobody has suggested that labour shortages are impossible. They very well may be occurring. Rather, the criticism of the piece is that there is no “there” there. Without knowing what a labour shortage is, how can we tell if we have them?

      Regards,

      Mike

  4. Lets simplify it for the laymen. In 2005/6 central banks and governments, herein as “govmints” increased Keynesian BS. That is Keynesian/Bernanke print money for goverment debt and lower savings interest rates to zero. Fact is in 2005/6 no one lent money to govmints to lose purchasing value. It created the 2007 credit crisis as people wanted their money back from debt, and debtors/banks couldn’t pay. Ignored, this caused the 2008 crash.

    You can see the effects of “thin air” electronic counterfeit money for debt and how it devalues money for hidden inflation pressures by comparing it to a currency that isn’t so fraudulently managed: (scroll down 1/2 a page for chart)

    http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

    Basically US Treasury debt is devaluing USD as no one is lending real money to govmints, they just create it out of thin air be it US Fed, BoC, EuroBank or a few others. Its a tax on money, pensions, wages, savings, cash….a hidden tax and drives inflationary pressures.

    Canada has had a bad year, home prices in CAD are up 8%, but the value of money is down 10%. This will cause unemployment, as people wih less value money, with higher prices, are going to get less goods and services.

    And what drives jobs is the affordable exchange of goods and services. It is that simple.

    Nothing govmints are doing is favorable to jobs and why govmint can’t solve the problems. The more they waste money/taxes, the worse it gets.

    Our current thinn air money for debt is going to fail. Every nation that has tried it has ultimately failed. Without a FAIR and stable currency, you can’t have a good economy. As devalued money is theft, fraud by another name like “Quantitative Easing”, but its still theft, fraud….and why govmint can’t fix the problems, as govmint bloat, waste, money for nothing, inflated contracts, bailouts, protectiosms….are the problem. Too much consuption and not enough production to support it….so we lose jobs too.

    In a tax inflated depreciating economy of debt fraud, we will all lose.

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