Link between high wages and economic growth

The T&T is running a story today quoting Francis McGuire as saying New Brunswice wages will need to increase by as much as 20%:

Businesses are fooling themselves if they think lower housing prices, friendly folk and scenic beaches are enough to attract people to the province, said Francis McGuire, a former deputy minister under premier Frank McKenna. In the end, it all comes down to money he said. “I go to Toronto and say ‘would you like to come to New Brunswick?’ and most real New Brunswickers say ‘I worked all my life to get out of there, I don’t want to go back,'” he said.”That’s what most of the kids are saying and if you don’t offer them as much money and as good as a career, they will not come. That’s the bottom line.” That means New Brunswick businesses will need to increase their wages as much as 20 per cent to meet the national average.

Francis would be well advised to consider other models of successful rehabilitation of underperforming economies – Ireland, certain southern US states, etc. In all of those cases, higher wages were a consequence of strong economic growth and not a precursor to it.

Wage rates are set by market conditions. New Brunswick’s economy has underperformed for decades and hence wage rate increases have underperformed.

A strong economic growth strategy focused on making New Brunswick a world leader in a few key economic sectors will be the force required to slowly increase wage rates. This will lead to incremental wage increases across industry.

Why is it that the government sector in New Brunswick has the highest wage premium over the private sector among all 10 provinces in Canada (according to a study I read in 2004)? Because, in that case, there is limited market mechanisms to set wage rates.

Stating that higher wages are needed to bring the province to self-sufficiency is accurate. Stating that local industries will have to become more productive and pay higher wages over time is correct. But introducing this as some kind of precursor to growth is extremely problematic.

There is still something like 50% or more of the non-local economic activity (not including retail, construction and other economic activity designed just to serve the local economy) that is offshoreable (call centres, much of our manufacturing, etc.). If we push for arbitrary and quick wage inflation, you could lose thousands of jobs.

I had this debate the other day with some extremely bright folks. We have dozens of small to medium sized manufacturers still paying between $8.50 and $10/hour for their production workers. If we force higher wages (by not addressing their increasing labour shortages or other action/non-action), we stand to lose those jobs – in the hundreds and thousands.

While, philosophically, we can debate the merits of a $9/hour job – and even the social benefit of such jobs (i.e. at that level, they don’t really pay taxes), I think a wide scale exodus of jobs without any backup plan would only grease the pole on which New Brunswick is already sliding towards decline.

I think we need to look seriously at immigrant and foreign student workforce solutions for specific needs in the local labour market. I think we need to target a few highly strategic sectors that are not as wage dependent such as animation, data centres, e-Learning, etc. and make New Brunswick a magnet for both companies, expatriates and just straight relocators.

As for Francis’ comment “I go to Toronto and say ‘would you like to come to New Brunswick?’ and most real New Brunswickers say ‘I worked all my life to get out of there, I don’t want to go back”,

I suggest he widen his scope of expatriates. When RIM announced they were setting up in Halifax, some 70 people stepped up and said they wanted to move there. That was just internal to their company. RIM is convinced they will attract workers from all over Canada to their Halifax centre. And I agree.

For those who ‘worked all my life to get out of there’, I say stay out. Enjoy your 2 hour commutes or $8 buck big macs (Fort McMoney). But I believe there are thousands of expatriates and other Canadians who would gladly move here for the right opportunity.

There are three in my office (out of nine).