CHAPTER 3 ECONOMICS, SOCIAL, AND POLITICAL ENVIRONMENTS
*Canada’s Top Problem Is Filling Labour Shortage
” Within a decade or two, there simply will not be enough workers in the country”
The supply of labour force is facing shortage due to the retirement of the baby boon generation and
the low fertility rate, including current level of immigration.
THE ECONOMIC CONTEXT
Great recession: a serious downturn in the economy around late 2008 characterized by very low or
negative growth and high unemployment triggered by the financial collapse in 2007, the worst since
the Great Depression of the 1930s.
5 elements in the Canadian government 2009 Action Plan
1. Action to help Canadians and stimulate spending: provide training and income tax relief
2. Action to stimulate housing construction: and encourage house ownership and enhance energy
3. Immediate action to build infrastructure
4. Actions to support business and communities: protect jobs and support sectoral adjustment
5. Action to improve access to financing and strengthening Canada’s financial system
Macroeconomic policy ( a policy that applied to economy-wide goals, such as inflation,
unemployment, and growth) with the respect to the liberalization of markets has been the most
important single influence on IR.
Almost all industries have been affected either directly through deregulation ( a policy designed to
create more competition in an industry by allowing prices to be determined by market forces) or
privatization ( the transfer or contracting out of services to the private sector) or indirectly through
policies that promote free trade in goods and services, such as NAFTA (a free trade agreement
between Canada, the U.S., and Mexico that has signed in 1994 and included a labour side agreement,
the North America Agreement on Labour Cooperation).
Globalization has resulted in greater mobility of capital and increase in the flow of goods and services
and increase in worldwide competition between firms and nations.
THE LABOUR MARKET
>Elasticity of Supply and Demand
Elasticity of supply/ demand: the labour responsiveness of supply/ demand caused by a change in
the wage rate
>Labour Power and Marshall’s Conditions
The shape of demand curve is important because it influences a union’s ability to raise wages without
significantly affecting employment level, which is known as wage-employment tradeoff.
There are 4 theoretical conditions that determine the wage elasticity of labour by Marshall:
1. PRODUCT MARKET
The more competitive the product market, the greater the employment impact of a wage
increase and elasticity of demand of labour.
When union increase wagesfirms in competitive market will reduce the cost by layoff
workersthe demand for workers will reduceunion will gain less power
Firms with certain degree of monopoly power tend to eliminate this situation by raising the
price of product other than decrease the demand for labour
The more inelastic the demand for labour, the lower the employment tradeoff from a wage
increase and the greater the union power.
Example: Canada Post to Outsource Call Centre Jobs 2. SUBSTITUTION EFFECT
The easier an industry substitute capital for labour, the less power labour will have to raise
However, this is a long-term effect since technology change takes year and certain jobs are
harder to substitute.
3. LABOUR INTENSITY
Labour intensity refers to the degree to which labour costs account for production cost
An industry is labour intense means labour costs are a high proportion costs.
The smaller the proportion of labour cost, the smaller impact of employment when there is a
wage increase, then the labour will have more power
Labour will have more bargaining power in capital-intense firms since the firm can absorb a
wage increase; unlike police and teachers (highly labour intense public services) will have less
4. MARKET FOR SUBSTITUTES
The more competitive the market for substitute factors of production is, the greater the
bargaining power firms will have.
The cheaper and more available these substitutes, the greater impact on employment, the
greater the employer’s bargaining power.
To summarize, demand is more inelastic and unions will have more power when
Product markets are less competitive
Hard to substitute labour for capital
Labour costs are a small proportion of total costs
The market for substitute is less competitive
>Noneconomic Sources of Union Power
Unions have successfully forged alliances with community groups to
Assist in organizing new members
Strengthen positions in bargaining
Support political lobbying campaigns
Oppose plant closures
Support strikes and other industrial actions
SUPPLY OF LABOUR
>Population and Immigration
Labour-force growth is fuelled by population growth and immigration
Female fertility rate has an important effect
Canada’s fertility rate is lower than the U.S., but close to the average rate of other industrialized
Population growth relied more on international migration in Ontario
There is a trend for births by older women
There are tradeoff choice between work and leisure due to the increase in wage and decrease in
The slightly decrease in average annual hours indicates that the income effect is only slightly
greater than the substitution effect.
>Noncompetitive and Institutional Factors
Monopsony occurs when a firm is the sole market buyer of a good, service, or labour
The firm is a wage setter; lower wages and employment levels Labour is assumed to be perfectly mobile, but there are several barriers to mobility. An individual
tends to have a lower probability of moving because:
Home province had a large population
The person lived in a larger city
The person was older, married, or had a family
Provincial unemployment was low or there were low level of individual unemployment insurance
or social assistance
The person was a prime-age male with low income
-INSTITUTIONAL BARRIERS TO SUPPLY
Applying Weber’s theory of social closure, research has shown that various occupations erect barriers
to entry to restrict supply and thereby affect earnings.
Lack of uniform licensing, inadequate training, and funding proble