Inequality rules

Last March, Bell Canada Enterprise circulated its 2012 executive compensation policy: 

we use three key elements of compensation with an aggregate target value positioned at the 60th percentile of what is paid in the competitive market for similar positions.

A few weeks later, Human Resources minister Diane Finley announced "a more efficient and responsive temporary foreign worker policy". This new policy allows employers to pay temporary foreign workers up to 15 percent less than the prevailing occupational wage rate:

Wages that are up to 15% below the average wage for an occupation in a specific region will be accepted; however, employers must clearly demonstrate that the wage is consistent with that of Canadian workers based on Statistics Canada data.

If these are the rules used to determine wages, income inequality will prevail.

It's impossible for all firms to pay their CEOs above the median salary - by definition, half of executives must be paid below the median. If the majority of firms adopt a compensation policy like the Bell Canada Enterprises one quoted above, CEO salaries will increase inexorably. 

At the same time, allowing firms to bring in temporary workers at less than the prevailing market wage prevents the price of labour from being bid up in response to labour shortages, dampening salary growth for workers at the lower wage end of the labour market.

Inequality rules.

Comments

[rp1]

"...dampening salary growth for workers at the low-skill end of the labour market."

This is not about the low-skill end.

[Kevin]

With regard to the temporary worker program: if there are labour shortages doesn't theory predict that employers should raise wages and benefits until there no longer exist labour shortages? I am imagining labour shortages out west and idle workers in the eastern provinces; maybe the wage isn't high enough yet to justify moving or switching careers? Instead the government has introduced a way to pay temporary workers even lower wages. Not exactly letting the labour market sort itself out!

[Frances Woolley]

rp1: "This is not about the low-skill end."

Income inequality is precisely about the growing gap between the low and high ends of the labour market.

Kevin, yup.

[tomslee]

I've often wondered if the fact that executives live in a Lake Woebegon world is a significant driving force for income inequality. Has the question been pursued seriously?

[CBBB]

When unemployment is high little is done to alleviate the problem and workers are expect to take pay cuts, reduced hours, worse quality jobs, etc.
On the other hand if there are labour shortages then no effort is spared to make sure workers don't get the opportunity to bid up their wages.

[Frances Woolley]

Tom - there's a couple of ways one could examine whether or not the rise in executive compensation is driven by every executive's desire to be above average.

One is to go through and read executive compensation policies for publicly traded companies, and see how many have "median/mean or greater" as a salary target. This would be a good PhD topic for someone doing political economy. I would have thought someone *must* have done this for the US, if not for Canada - I always figured that the Lake Woebegon effect (everyone wanting to be better than average) was widely known to be a factor in the rise in pay. But I couldn't find any papers specifically analyzing this in 30 seconds on google scholar.

Another way of examining the Lake Woebegon effect is to look at the impact of disclosure regimes on executive salaries. This paper here surveys the literature. Tying Executive A's salary to the salaries of Executives B through G only works if the salary information is publicly available - and that requires salary disclosure. So one can examine the relationship between the disclosure regime and trends in executive pay. It's always hard to figure out exactly what's driving changes in aggregate level data however.

[Frances Woolley]

From Rogers 2012 management circular:

In 2010, the Compensation Committee adopted a policy of generally positioning target total
direct compensation of the NEOs around the median of the primary peer group, with the incentive
programs being designed so that actual total direct compensation levels are in the top quartile
among the peer group when performance is also top quartile.

There's a lot of talk about not positioning in the Rogers circular, but it sounds like the pay structure is designed so that it ends up at at the median or above.

[Determinant]

When unemployment is high little is done to alleviate the problem and workers are expect to take pay cuts, reduced hours, worse quality jobs, etc.

On the other hand if there are labour shortages then no effort is spared to make sure workers don't get the opportunity to bid up their wages.

This is why I look forward to an NDP Federal Government. Regulations and programs like that would be put on the chopping block.

BTW I received their Super-Secret Plan (in the mail) for fighting the 2015 Election.

[Mr. R]

I blame NAIRU. The deliberate creation and maintenance of a Reserve Army of Labour for the purpose of suppressing wages. It has been official policy in practically the whole West since 1979. When Greenspan felt compelled to suspend the NAIRU rule for reasons of financial and hedge fund crises in the late '90s, the bosses called him up pleading with him to relent, to enforce NAIRU, as failure to do so was forcing them to hire disabled people, to have to bus their workers to the work site, to actually pay them more. The horror!

[Diarmid Weir]

'...an aggregate target value positioned at the 60th percentile of what is paid in the competitive market for similar positions.'

Which appears to imply a contradiction. If it were really a 'competitive market' it would be irrational to target anything other than the 50th percentile.

[Mike Moffatt]

RE: Foreign worker permits.

The inequality discussion changes a great deal if you consider the effects it has on Canadian inequality vs. global inequality. Why should the former necessarily be the lens we use to look at this problem?

This is not a new phenomenon: During the Jim Crow era, those policies were defended on the grounds that without them, the wages of low-skilled whites would fall.

[Frances Woolley]

Mike: "Canadian inequality vs. global inequality."

Mike, this is a reasonable question. A variety of responses:

- if our concern is global inequality, immigration or (thoughtful) aid is a better solution than temporary foreign workers - especially given the new policy that would see some groups foreign workers required to leave the country after four years, making it hard to for them build a better life for themselves and their families (I'm just trying to work out how that one is going to work)
- depriving other countries of their best/brightest/most mobile citizens may not be the optimal way to improve their economies
- the responsibility of the Canadian government is to make policy for Canadians.
- There are about 7 billion people on this planet. The vast majority of us would receive barely more than a subsistance wage if we sold our labour in the global market place. Arguably the best way to reduce inequality at a global level is to fight to improve the living standards of workers (and decrease the living standards of CEOs) on a country-by-country basis.

[Mike Moffatt]

Frances:

I agree on point 1 and 2 (though point 2 would seem to contradict point 1). But that's ultimately a different argument ("this policy increases inequality" vs. "this policy reduces inequality but there are better approaches").

RE: Point 3, I can agree with as long as it's applied consistently. But let's taking climate change. One could make a very good argument that a warmer climate is in Canada's interests. If that's the case, should Canada not be actively trying to undermine Kyoto? If they did/are, should that not be seen as a good thing?

4 (along with 3) I can't agree with simply because it seems like we're ignoring the plight of non-Canadians simply because it's convenient. I'm quite uncomfortable with the argument because how it's been used in the past.

[SecretServitude]

Mike; to your response to Frances' Point 3; Where does this argument come from, that Global Warming, or climate change, is good for Canada? An argument not backed by anything I've ever come across. Please point me in the direction of your reasoning?

As to your point 4; Frances has a valid point in saying let's deal with our issues presently... We are not going to change the world's fundamental flaws any time soon; nor is it going to happen until our own issues are dealt with, including the widening disparities we are seeing with income inequality. Addressing the issue of income globally I feel is intellectual dishonesty. It serves to confuse the issues we are dealing with in our own Country. An immediate example that comes to mind; in Caterpillar's bid to cut their Canadian unionized workers wages by half, with their reasoning being that their American counterparts were making a much lower wage. It's a false equivalence.

[Bob Smith]

Of course, we're operating under the assumption that the domestic labour market is efficient and reasonable functional. If true, than Kevin's observation, that labour shortage is a function of low wages, would be a fair one.

On the other hand, there's all kinds of reasons why we might think that isn't the case. We might have regional income support problems which drive the reservation wage of the unemployed above their marginal product of labour in regions with labour shortages (EI, anyone, with regionally enhanced benefits and eligibility?). There may be fixed costs associated with moving from areas of low unemployment to high unemployment which make such moves unduly costly (having to sell your house, move away from family, etc.) which costs are lower for foreign workers (if, for example, they are accustomed to moving to follow work). In that case, the existence of unemployment in one part of Canada tells us very little about the appropriate wage rate in the other part since the two markets are imperfectly connected.

Moreover, in that case, its quite possible that the prevailing local wage rate is too high - i.e., if Canadian labour marker were efficient and movement was costless, people would move from, say, Nova Scotia to Alberta, and the Alberta wage rate would be lower than it actually is. The same factors that make movement unprofitable for workers in areas with high unemployment might also drive-up wages in areas with low unemployment. Seen in that light, the 85% threshold might make some sense, since to require employers to pay prevailing wages (which reflects labour scarcity) locks in a wage rate that wouldn't prevail in the presence of an efficient domestic labour market.

In those, plausible, scenarios, the guess worker program allows foreign workers to fill a niche that would otherwise go unfilled, which is prima facie desirable. (Although I share Frances' preference to make it easier for such workers to become permanent residents)

[Mike Moffatt]

SS: It's a *very* common argument, having to do with the northwest passage and opening up more mining in the north. I'm not convinced it's correct, but I'm shocked you've never heard it.

We'll have to agree to disagree about the importance of global inequality. I see it as being a significant problem. Saying "we can't help foreigners until we solve all domestic problems" is basically admitting that we'll never help non-Canadians. I'm not comfortable with that.

[Determinant]

So why have the guest worker program allow a 15% wage cut to prevailing Canadian rates instead of just prevailing Canadian rates, or 10% over Canadian rates, just to encourage a decent search before resorting to foreign labour?

[Bob Smith]

I think its important to clarify that Frances may have inadvertently misdescribed the policy. It actually allows employers to pay foreign workers "wages that are up to 15% below the AVERAGE WAGE RATE for an occupation in a specific region" not the prevailing market rate. That's an important distinction, since at any given time a good chunk of Canadians in a given region and occupation(probably more than 50% given the skewing of income distributions) make less than the average wage rate in that occupation and region (as Frances rightly noted with respect to CEO compensation, that's what makes the average, the average). And, note, employers are still required to show that the wage is consistent with that of Canadian workers based on Statistics Canada data.

[Kevin]

Bob, when I made my comment I had in the back of my mind that there are natural barriers to moving to where jobs are plentiful. However, I believe that at some point the wage will be high enough to induce the most mobile to move (which are the one's who should be moving). See the diaspora from Newfoundland for evidence that this happens. We will never be able to agree on whether the wage is too high/too low, however, I am not sure comparing against a fictional reality where it is costless to move is the correct notion of what the "efficient" wage is.

In my opinion the current government does not seem to have a well defined jobs strategy for young people who have high rates of under/unemployment in many parts of the country. Young people are the most likely to move to where the jobs are and the most likely to acquire the skills that are in shortage. I fear that the temporary worker program works against these natural incentives.

As for EI, I agree that it can act to distort the labour market. I would rather deal with that one head on than create another market distortion to offset it's perverse impacts in the case of some seasonal workers.

[Bob Smith]

"I would rather deal with that one head on than create another market distortion to offset it's perverse impacts in the case of some seasonal workers."

But hang on a second, how is it a "market distortion" to say that you can offer wages that are as low as 85% of the average wage? After all Canadians in any given industry or region do work for 85% of the average wage. I'd suggest that few, if any, Canadians actually work for the "average wage" since it is, after all, a purely theoretical concept (on average Canadians have one testicle and one ovary, but I doubt that's an accurate description of many Canadians). Surely it's a greater market distortion to say that you have to offer wages at (or above) the average.

[Kevin]

One of the purposes of EI is to insure workers who unexpectedly lose their jobs. It is not often ideal to have to take the first available job one receives in unemployment as you may be poorly matched to it. Therefore, some time searching is optimal (which leads to frictional unemployment). EI helps make this optimal activity possible. However, it also has some (unintended?) other consequences, one of which you raised.

Already the notion of frictional unemployment and introducing EI and it's sometimes perverse incentives brings us away from a simple model of the competitive labour market(the distortion I mentioned). Introducing new immigrants who are Canadians would constitute a rightward shift of the labour supply curve (which I am more inclined to support).

However, the temp worker program has the wage being determined contractually with workers in another country who exist in a spatially separated labour market with a different supply elasticity, etc. I think it is introducing a significant movement away from the competitive model. If the purpose is to make up for some of the unintended consequences of EI or the fact that it is costly to move or retrain workers, then there are simpler ways to accomplish this.

RE: 1 testicle and 1 ovary. Point taken. Gave me a chuckle.

[Bob Smith]

"However, the temp worker program has the wage being determined contractually with workers in another country who exist in a spatially separated labour market with a different supply elasticity, etc."

Well, we have to be careful about this. Why is, say, the North Dakota labour market spacially separated from, say, Alberta's labour market, but the Nova Scotia labour market isn't? That seems like an artificial distinction.

Moreover, if you accept that their are rigitidies in the Canadian labour market, it's entirely possible that we can't match unemployed workers in one province with employers in another. If you've got a worker whose reservation wage is $15 an hour, and an employer who's willing to pay up to $14 dollars, that's a job that will go unfilled. In that sense, someone coming from Mexico (say) to fill that job at $14 an hour isn't depriving the Canadian worker of a job, or depressing his wages, since that employer would never have paid the Canadian worker $15 an hour.

"If the purpose is to make up for some of the unintended consequences of EI or the fact that it is costly to move or retrain workers, then there are simpler ways to accomplish this."

Sure (although whether such changes are politically simple is another question). But I don't think the purpose of this prgoram is solely (or even primarily) to deal with the unintended consequences of EI. The primary purpose of the program is to bring in skilled workers who just aren't available in Canada. In Toronto, for example, it is (or at least was, when the market was stronger) often the case that skilled tradesman are (or were) brought in to work in the construction industry due to real shortages of skilled trades in Ontario, aggravated by the flood of skilled Ontario workers out to Alberta. Along the same lines, I recall reading a few years ago how there no Canadians being trained as upholsterers, causing sofa manufcaturer/repairers to have to import Portuguese upholdsters. (It's a sad commentary on our education policy. Why make good money building houses or making sofas, when you can get a degree in sociology... but I digress). Indeed, one of the conditions for bringing in foreign workers is satisfying the government that you can't find suitable Canadian workers.

Part of the problem is that people are focussing on the 85% figure, without looking at the program as a whole.

[Kevin]

The North Dakota labour market is seperated by a border. So is the Mexican labour market. So I concede it is not just a spatial issue but I think the point still holds that the wages are being determined in a labour market that is in effect separated.

If it costs $15 an hour to attract a worker maybe less jobs will be created, but the firms will still find it profitable to open some jobs. This is the natural process of vacancies bidding up the wage. My initial point about this program is that it gets in the way of this natural market process. By giving employers access to an outside labour market it weakens the bargaining position of Canadian workers as well, which will affect wage determination and increase inequality.

I agree that the point of this policy is not to deal with EI problems. I only got into EI because you brought it up a few posts ago as an example of why people might not move.

Given that we require immigration to sustain our population I am all for targeting certain skills and giving them the opportunity to become full fledged Canadians with all the rights and privileges that come with it. This is a country built on immigration. However, something to consider is that creating temporary positions where the workers do not have all the rights and privileges of citizens has the potential to be exploitative as well. I know temp agriculture workers near my home town are NOT treated well at all.