Budget 2013 was a fair response to the growing debate about whether Canada’s labour market is working well. But until we have better data, we may not understand the full picture.

If the theme of the Conservative government’s previous budget was longterm planning for Canada’s aging workforce, Budget 2013 shifted attention back to the here and now. Finance Minister Jim Flaherty’s announcements of the proposed Canada Job Grant and changes to the Temporary Foreign Worker Program were the government’s response to the spike in concern from a number of vocal stakeholders about whether our labour markets are able to connect people with jobs.

Employer and labour groups found elements to like in Ottawa’s response (though not necessarily in the same places). But the question remains whether these are the right solutions to the right problem.

Much of the public discourse suggests that Canadian labour markets suffer from a shortage of workers in certain industries, coupled with mismatched skills among the available labour supply. These phenomena, the argument goes, are exaggerated by the difficulty of moving workers from low-growth to high-growth provinces and industries, along with inadequacies in how schools develop skills and connect learners with employers.

Unfortunately, given the significant gaps in Canadian labour market data, it’s hard to tell if the phenomena actually exist. And a cursory look at the few key indicators we have leaves most economists skeptical.

By international standards, Canadian labour markets are generally viewed by employers to be highly efficient and flexible. According to the 2012 World Economic Forum’s World Competitiveness Index, which surveys executives across 144 countries, Canada ranked 4th in the perceived competitiveness of labour markets and labour market institutions.

Likewise, the Bank of Canada’s quarterly Business Outlook Survey shows little sign of a market imbalance. On the question of whether employers see labour shortages as a real constraint ”on your ability to meet demand,” the current period indicates a below-average level of supply constraint (figure 1).

At the same time, total job vacancies in Canada have remained relatively stable over the last two years (when Statistics Canada started collecting this information), unchanged at 1.5 percent of labour force demand in December 2011 and December 2012. The United States is currently experiencing both higher vacancies and higher unemployment — likely signs of a skills mismatch exasperated by prevalent long-term unemployment. But Canada’s problems seem to be more isolated and cyclical rather than evidence of widespread imbalances in the overall labour market. The absence of pressures on median real wages in the last seven years (up just 5 percent since 2006) reinforces this point.

It is also instructive to note that evidence from the last two rounds of the Adult Literacy and Life Skills Survey shows Canada has a mismatch between the skill levels attained by workers and the skill requirements of their job that is just slightly below the average of the nine countries participating in the survey (figure 2). To the extent we have problems in our labour market, they are no worse than those faced by some of our competitors.

There is little doubt that certain parts of the Canadian economy, particularly low-unemployment and resource-rich provinces such as Alberta and Saskatchewan, are facing critical challenges in meeting employment demand. It’s also true that over the next several decades, the significant demographic shift of baby boomers into retirement (already under way) will slow overall labour force growth.

But the key question for policy-makers should be whether our labour markets on the whole are operating efficiently, and here the more critical and urgent problem is sluggish aggregate demand in the overall economy. Regardless of one’s perspective about the extent and nature of challenges in Canadian labour markets, there are reasons to be optimistic about the changes announced by Ottawa.

In the budget, the government declared its intention to significantly increase the burden of proof on employers to show that a Canadian job can be filled only by temporary foreign workers (TFWs). Considering the exponential growth in the number of TFWs admitted to Canada in recent years —  approximately 214,000 in 2012, up from 110,000 in 2002 —  this departure in policy is a worthy attempt to help Canadian workers find jobs in a period of stubbornly high unemployment.

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While details are still to follow, in principle these changes are aimed at lengthening the period and broadening the scope in which employers must search for a Canadian applicant before applying to the TFW program. They will eliminate any foreign language requirements applicable to the position so that Canadian workers are on an equal footing with TFWs. And they will introduce a cost-recovery policy when employers are required to obtain a labour market opinion from the government attesting that a Canadian is not available for the job.

Without better data, it is hard to know how much impact these measures will have, but it is generally accepted that TFWs have some effect in holding wages down in certain occupations. Ensuring that employers —  and not taxpayers —  bear the full cost of the program is an excellent step forward. Placing a notional cost on employers using the program should make them more cautious about using TFWs in the future. But we could also go farther in how we use this policy lever over time.

One model suggested by Christopher Worswick at Carleton University could involve taxing participating employers, with the proceeds being used to fund training and employment programs for Canadian youth. How employers respond to these price signals might actually give us significant insight into the larger mismatchversus-shortage debate noted earlier, as well as help clarify the role that TFWs play in Canadian labour markets.

While the crackdown on TFWs may have disappointed some employers, the Canada Job Grant is likely welcome news in front offices. The grant, which would draw $300 million from the next round of the federal-provincial Labour Market Agreements (LMAs), would provide $5,000 in a matching credit to businesses to support shortterm training for unemployed workers seeking to start a new position, or to help the already employed move to a job that is better paying. While its name implies the creation of new employment, in effect the credit is an effort to stimulate new investment in workplace training.

Data on workplace training in Canada are, as in much of the story I have told already, limited in a number of respects. There are annual surveys that sample a collection of employers on their spending activities, and several point-in-time surveys of workers. But we lack timely, comprehensive and ongoing longitudinal data at the firm level to help explain how and why these investments occur.

From the empirical evidence we do have, several relevant points can be drawn for our purposes:

  • Businesses are very good at understanding the costs and benefits of training. They often allocate training to employees or jobs with the highest returns on investment, and usually for learning that is specific to job requirements. (Longer-term skills development is the role of the individual and government.)
  • There is some evidence that training investments may be countercyclical, rising at times of relative economic weakness. That means simply the amount of overall training dollars being spent may not be the best metric for policy-makers.
  • What really matters is what is happening within industries and, in particular, what is driven by the adoption of new technology.

Because federal funding for the job grant is being reallocated within the envelope of LMA funds, a key objective for Ottawa is simply to spend these dollars more efficiently. There has been some suggestion that Canada underspends in workplace training relative to the United States, and when this expenditure is measured simply as a percentage of payroll costs, that appears true. When controlling for our different demographic and industrial structures, this gap is less significant. But it may still be that businesses on either side of the border don’t spend as much as they should. If the new matching dollars can leverage more spending by businesses, that would be a good thing. But we also need to make sure that dollars are focused on the right problem.

An obvious concern is that new funding may simply substitute for or crowd out other investments in training. It will be key to see how businesses will be expected to identify potential trainees. While we are still facing high levels of unemployment, the focus on short-term training is likely a useful approach for the program. It could help make job turnovers more efficient, which should help get more workers hired, more quickly. Governments will have to closely review the grant’s effectiveness once we get back to a more normal period of unemployment, to see if it can have a lasting role.

All this underscores the absolute need for better data to understand how and to what end we should be applying resources. Both federal and provincial governments need to get serious about investing the very modest sums of money required to create a coherent labour market information system, as recommended in 2009 by the advisory panel led by Don Drummond. If Ottawa is concerned about the effectiveness of programs, this should be at the core of the next round of negotiations with the provinces next year.

If the data show we do indeed have a skills mismatch and if the problem lies in the learning and training process, then we need to use this opportunity of the LMA renewals to think strategically about long-term job market needs. The focus that the job grant brings to the issue of the under-employed is an important opening into a much broader discussion we should be having about how people acquire the right skills before they find themselves unemployed.

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Closely related to this is the issue of literacy and numeracy, which gets little attention in the budget. People with higher levels of literacy not only are more productive and hence earn more, but they also re-engage in education and training more consistently throughout their career. It is a gateway to so much more.

There are ways that literacy and numeracy can be improved through employment training, but I think most employers would agree this is a basic function of human capital development where government has a critical role to play.

The need is clearly there. Data compiled by the University of British Columbia’s David Green and Craig Riddell suggest that Canada, along with other nations, is seeing some declines in literacy through successive cohorts. In our case, this decline appears to be concentrated at the top of the literacy distribution —  among the highest skilled. We may be losing a culture of learning.

While the federal government’s role in education and training is at best ambiguous relative to the jurisdiction of the provinces, this budget signals Ottawa’s real concern for the national interest in how our labour markets perform. The process may justifiably rankle some provinces worried about federal interference, and it is certainly true this government is making somewhat of an about-face from the last round of negotiations. But provinces should embrace the opportunity for a broader discussion with the federal government about skills, labour market information and data, education and labour market policy. It would be a terrible waste if all that emerges from the upcoming negotiations is another case of haggling between governments about how to divide a fixed pie of dollars.