To facilitate, not prevent, the necessary structural adjustment in Canada’s economy, labour market policies are key.

On Monday, the Governor of the Bank of Canada, Stephen Poloz, gave a speech in Calgary, Alberta. If you missed it, here are two important quotes:

“…business leaders must be aware of the risks involved in resource production, manage those risks as best as they can, and be ready to react to market signals and seize opportunities… Policy-makers can help in these efforts by encouraging economic flexibility.

 …rather than resist market forces, Canadians should heed the signals sent by price movements. We’ve adjusted to rising prices; we can adjust to falling ones. These adjustments are never easy. They are often difficult and painful for affected individuals and their families. But they are necessary.”

Decoding “central bank speak” is notoriously difficult, but here’s a quick summary of the main messages from Poloz’s speech:

The recent drop in energy prices has been tough. Unfortunately, given the lower longer-term outlook for energy prices, the Canadian economy now has too much capital and labour in the oil patch. Economic resources need to move. This adjustment will be painful and slow, but is needed. Sadly, monetary policy can’t offer much additional help. The Bank has already cut rates by 50 basis points since the oil price shock, and is near the limits of its ‘conventional’ measures. Thankfully, the flexible exchange rate has allowed for a weaker dollar, which is offering some support by making Canada’s exports cheaper for foreign buyers.

More generally, Poloz’s remarks highlight a critical outstanding question: (How) Can policy-makers help Canada’s economy adjust to large, sustained global commodity price shocks? And, if we are correct that Poloz is suggesting that monetary policy isn’t the place to look for further policy support, where should we look and what other policies might help?

Fiscal policy is a natural candidate. Here, Glen Hodgson and Pedro Antunes (of the Conference Board of Canada) have wisely suggested that, because the oil price shock is geographically concentrated, a targeted provincial fiscal policy response might be preferred to a less-directed national one. Their strategy would temporarily allow for large budget deficits in Alberta, Saskatchewan and Newfoundland and Labrador due to the steep drop in energy revenues and royalties. Increasing spending in these provinces on infrastructure and related initiatives might help. The merits and trade-offs implied by this approach are certainly worth evaluating, but we think that Canadian policy-makers should also look elsewhere — to labour market, education and training policies.

With the rise of fly-in/fly-out work arrangements over the past decade, many in the oil patch were able to work and live in different provinces. Research by Statistics Canada shows that from 2003 to 2010, “inter-provincial employees” accounted for up to 6 percent of employment in Alberta, including 12 percent in the oil, gas and extraction sector; and 14 percent in construction. The number of inter-provincial employees in Canada rose significantly as the price of oil increased (see figure).

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Source: Morissette and Qiu (2015)

Without newer data, we don’t know what has happened since. Commuting workers will help in the adjustment process by staying in their home province. This will act as an ‘automatic release valve’ for Canada’s labour market. Indeed, as Poloz noted:

“Canada’s labour market showed impressive flexibility when oil prices were rising, as workers flocked to Alberta to fill demand. And, in our latest Business Outlook Survey, the Bank saw evidence of labour shortages easing in regions where some interprovincial workers are returning from the oil patch.”

It’s no surprise that many workers who made their way to Alberta were younger men. While we don’t know their educational profiles, various research on commodity cycles suggests those most often drawn into the boom are those with lower levels of education.

In a crude characterization, one might think of the resource jobs of the 2000s like the blue-collar assembly-line manufacturing jobs of the 1990s. Both offered an opportunity for younger, less-formally-educated (primarily male) workers to earn decent wages. If the commodity cycle remains in a trough and both of these jobs are hard to come by for today’s youth, then this increases the importance of our education and re-training « second-chance » systems.

Commodity cycles have important effects on learning and employment decisions, particularly for youth. A 2013 Statistics Canada paper found that the commodity-rich provinces (Alberta, Saskatchewan and Newfoundland and Labrador) experienced the 2002-2008 period quite differently that the rest of the country. In at least two of the three provinces, university enrolments dropped at the same time as they rose elsewhere in the country. At the same time, the share of male youth neither employed nor in education (the NEET rate) declined far more significantly in those provinces than in the rest of Canada (see figure below), suggesting resource jobs brought new people into the labour market who would not otherwise have participated.

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Source: Morissette, Chan, and Lu (2014)

What does this mean for where we are today? To better understand these issues, let’s distinguish two different groups:

First, the oil boom may have induced some workers to prematurely leave school. They likely made good money during the boom, but their lack of education might leave them vulnerable during the bust.

Second, the oil boom brought some workers into the labour market who otherwise didn’t have great job prospects and may never have been intending to go to school (the NEET group). These workers are likely better off, but face uncertainty about what will happen next.

The temptation for both workers, who are now a bit older than when they started in the oil patch, is likely to try and find work as soon as possible. A better option, may be to return to school.

Tyler’s forthcoming research for the IRPP shows that higher education remains an attractive financial investment for students well into adulthood. In this respect, workers coming out of the resource sector need to be well-informed about their job and training options.

Research by Anna Ferrer and Alicia Menendez supports the notion that a delay in higher learning is not penalized, if the delay occurs because the person is working. Encouraging for those in the oil patch who delayed school, the authors find that work experience before or in between learning results in higher earnings upon graduation compared to those who went to PSE directly.

Therefore, the critical questions now, are: will lower-skilled resource workers go back to school? And will those without much formal education (and prospects), but who got some labour market experience, be left in better shape because of the oil boom?

Recent Canadian research on the oil boom of the 1970s presents a complex picture. That research suggests that human capital investment in Alberta was higher as a result of the boom, but this effect did not persist after oil prices returned to lower levels (though, of course, the nature of this last cycle may have been different).

The focus now should be on using the oil price bust to improve human capital acquisition, both in resource-rich provinces where the boom occurred, as well as in the other areas of the country that were the source of “inter-provincial employee” migration.

As Stephen Gordon points out, and as Poloz’s speech made clear, this on-going adjustment will be neither short nor painless for the resource-rich provinces, but it’s needed. However, this is not to say that it should be left entirely to the market to decide. There is a productive role for policy to help the transition process:

  • Governments should level with citizens — as Poloz has done — and emphasize to Canadians that this downturn could be long-lived, and painful adjustment is required.
  • As Alberta faces important fiscal choices in preparing its budget, it should prioritize investments in training and PSE. Significantly cutting spending in this area in order to balance the budget would be a mistake. Now is the time to increase access to retraining and PSE for vulnerable youth and younger workers, including those with prior work experience in the oil patch.
  • When implementing job search and employment supports for laid-off workers in the resource sector, consider a “train first” rather than “work first” philosophy. Far too often employment programs emphasize job search and rapid re-employment as the solution to joblessness, when in fact a longer period out of work, focused on training, could be better in the long-run.
  • Finally, policies to cushion those negatively affected during the adjustment will generally entail trade-offs — for instance, they may prolong the process, or have distributional impacts — but they can also make things easier on those undertaking the adjustment, and in the process benefit society as a whole while the economy adjusts.

We can do better for those negatively affected by lower oil prices. As a profession, now is the time for economists to search out creative policy approaches to aid the adjustment process. That starts by thinking beyond our traditional policy levers.