Commission Research

Social and Economic Impact of Labour Standards

Prepared by Morley Gunderson

Executive and Worker Summary

The purpose of this paper is to analyse the social and economic consequences of labour standards - in particular, to assess the positive and negative effects of enhanced labour standards on economic performance (e.g., employment, productivity and competitiveness). The theoretical framework for outlining the underlying causal mechanisms through which labour standards are expected to have their impact is derived mainly from economic principles, but they are principles that place considerable weight on improving the situation of the more vulnerable members of society. Empirical evidence on their actual impact is also provided, and the theory and evidence then linked back to the policy issues.

The paper begins with a discussion of the changes associated with the new world of work as those changes emanate from various pressures:

• the demand side of the labour market;
• the supply side of the labour market;
• the institutional and regulatory framework; the
• manifestations of those changing pressures; and
• changes in the workplace and human resource practices within the internal labour markets of firms.

The implications of these changes for the application and effect of labour standards is then discussed. Attention is paid to such factors as:

• the conflict between competing interests;
• the extent to which market forces are increasing the demand for labour standards but at the same time as they are constraining the ability of governments to provide them
• the relationship of labour standards to active and passive adjustment assistance programs;
• optimal enforcement issues;
• opting-out issues; coverage,
• exceptions and exemptions; and
• reduced reliance on unions for enforcement.

The social and economic impact of specific labour standards is then discussed, focusing on both the underlying theoretical, causal relationship as well as the empirical evidence. The specific standards that will be examined include:

• hours of work and overtime;
• minimum wages;
• equal wages;
• vacations, holidays and leaves;
• terminations, severance pay and unjust dismissal protection; and
• protection against harassment.

The paper then concludes with a discussion of the main policy implications.

Factors giving rise to an increased need or demand for labour standards include:

• increased exposure of workers to the vicissitudes of market forces;
• risk shifting from employers to employees;
• increased non-standard employment many of whom are vulnerable workers;
• increased wage inequality;
• increased part-time employment of students and difficulties making the transition from school to work;
• increased number of older workers making the transition from work to retirement and increasingly from retirement back to the labour market;
• work-family balance issues associated with the increased number of two-earner families;
• increased need for a basic safety net that provides a modicum of protection, reducing the resistance of workers to otherwise efficient changes associated with free trade, deregulation and technological change
• Declining union power.

In spite of this increased need or demand for enhanced labour standards, the analysis of this study suggests caution in a blanket enhancement of labour standards, and especially for the federal government being a leading-edge model in this area. As detailed in the study, and summarized in the conclusion, reasons for this caution include:

• Costly labour standards may deter competitiveness, and this can mean lost jobs and lost investment, especially given global pressures.
• The possibility that higher standards can spur productivity and competitiveness is based on shaky grounds, both theoretically and empirically.
• Some of the costs may be shifted back to workers (e.g., in the form of lower wages or non-wage adjustments) but they can generally ill-afford to absorb such costs.
• To the extent that the costs are not shifted back to workers or forward to customers (given that prices tend to be set on world markets) this can mean reductions in employment, in which case a trade-off has to be made between a less-protected job and no job.
• The changing nature of work (e.g., small firms, non-standard employment) has made monitoring and compliance even more difficult. Non-standard employment may also be too heterogeneous to try to "protect" in a uniform fashion.
• The changing nature of work (dual-earning families and more non-standard employment) also provides other forms of risk sharing.
• Better pay and working conditions can make work attractive relative to welfare or other income maintenance, but if government cost-saving is the rationale why should the costs initially be placed on employers?
• Labour standards are closer to passive income maintenance programs (buffering the effects of negative shocks and hence deterring adjustment in the direction of market forces), than they are to active adjustment assistance (involving skills and human capital formation and hence that foster adjustment from declining to expanding sectors).
• There is both theoretical and empirical support for the notion that a relatively expansionary and deregulated labour market can foster job creation that disproportionately assists marginal and vulnerable groups, transforms non-standard to standard jobs, facilitates earning income rather than receiving it as a transfer payment, improves human capital formation (especially through work experience) and places pressure on employers to provide more family-friendly practices. More research is needed, however, to determine the extent to which such a rising tide raises all boats, or mainly raises all yachts, leaving behind the dinghies and those anchored to the bottom.
• While this analysis suggests a cautionary orange light with respect to labour standards, not all standards are the same with respect to their cost implications and their possible offsetting benefits. A green light may be more appropriate for a number of labour standards: advance notice policies which may foster efficient job matching; rights-to-refuse overtime; the use of overtime premium rates rather than quantity restrictions on maximum hours regulations; and protection against harassment which may improve morale and workplace productivity.
• A red light seems appropriate, however, for using federal labour standards to serve as a leading-edge role model for the provinces. There may be political benefits to be garnered by such a practice by appearing as the progressive jurisdiction, and the economic costs in the federal jurisdiction are likely small given the nature of its employment. But this simply means that the federal jurisdiction does not bear the cost of its actions. The political costs are either born by provincial governments by not following suite, or the economic costs are born by market participants in the provincial jurisdictions. The principle that parties should bear the consequences of their actions suggests that this temptation to garner political gains as a role model should be resisted in the federal jurisdiction.