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The Effects of Equalization on Canada’s Labour Mobility

By Sean McConnachie

Introduction:

In the 2007 Federal Budget the Government of Canada outlined the


transitioning of the Equalization program to one that is more reflective of
“Canadians’ strong commitment to “fairness” (Canada, 2007). This claim is largely
back by the return to a formula base, calculations driven Equalization program as
suggested by the Department of Finance’s Expert panel on Equalization. The
implementation of the Expert Panel’s recommendations for the fiscal year of 2008-
2009 has been asserted by many academics and policy pundits as a major step
towards improving equalization. Though I do not dispute this occurrence as a
positive one, I do quarrel that the principles used in the Expert Panel’s prescription
are incomplete as they do not take into consideration the effects of the program on
Canada’s economic landscape. What is notably absence in the 2007 Federal Budget
and the analysis provided by the Expert Panel is a focus on how equalization affects
the Canadian economy and whether or not its effects are positive or negative.

When the Dominion of Canada was established in 1867 through the British
North America Act, one of the main objectives of Sir John A. McDonald was to create
economic integration amongst the various colonies in Canada through the creation
of a flexible and unified economy. This flexibility and the performance of the
Canadian economy would largely hinge on the freedom of labour to move from
province to province based on labour market demand and supply. Equalization was
also design with these principles in mind and was intended, to some extent, to be a
major mechanism to facilitate labour mobility in Canada; in light of the difficulties
associated with the Tiebout model. However, with the expanding labour shortages
in the provinces of Alberta and Saskatchewan, and continually high unemployment
rates in many of the Eastern provinces, it has become evident that there are various
factors impeding labour liquidity amongst the provinces.

It is believed, within various academic and political circles, that equalization


leads to distortions in the mix of incentives facing regional labour forces through the
subsidized provision of various programming within the recipient provinces. Based
on this, it can be perceived that equalization allows particular provinces to increase
expenditures in policy areas that will theoretically have a large effect on labour
mobility amongst provinces, i.e. social safety net programs. Therefore, it is
imperative to examine how, if at all, equalization affects those programs that distort
incentives and how these programs in turn affect migration rates amongst the
provinces.

If it can be perceived that equalization is no longer a positive macroeconomic


adjust mechanism, then how is it affecting the economy? If equalization holds
negative effects on the economy, what are these effects and to what extent are
they likely to occur? Based on the labour shortages and surpluses that are currently
being experienced in various regions within Canada, it seems appropriate to
examine how, if at all, does equalization affect labour mobility in Canada and if so,
what measures could be taken to mitigate this effect.
Miss-guided Principles:

Though Equalization was created as a mechanism to ensure a specific


standard in public services amongst provinces, it was also intended to create
migratory freedom for the citizens of Canada. Both of these goals were to be
achieved through the insuring of “comparable levels of public services at
reasonably comparable levels of taxation” amongst all provinces within Canada.
This relative equality in services provided would allow the individual to freely
choose which province they would prefer to reside in based almost entirely on their
own personal preferences and the market incentives within each jurisdiction.

For many years, it can be argued, that equalization was largely able to fulfill
the aforementioned goals. However, the program itself, over the decades, has been
remodelled so many times that it is now a shadow of its former self. Equalization
being used as a political tool since the 1980s aside, the ability of the program to
fulfill both its basic roles as a mechanism of equity and economic efficiency, has
been faulting as policy analysts and government officials have been predominately
focusing on the former of the two principles when evaluating the program. This has
resulted in equalization turning into a social policy crutch, rather than an economic
assistance program, for receiving provinces, and has skewed migratory incentives
within these provinces.

While the principle of equity is of the utmost impotence and needs to be held
in consideration while examining equalization at any level; it should not be a
smokescreen for the effects that this program has on the Canadian economy as
whole. In its original design, equalization was a program that held positive effects
for the economy, as it acted as a macroeconomic dampener to negative regional
shocks, insuring stable economic growth among all provinces. This principle,
however, has receded into the shadows as very few examinations, both at the
academic and governmental levels, incorporate nationwide economic objectives.
With the modern complexities of an integrated federalist economy, all macro
adjustment instruments must be reflective of the contemporary climate of the
economy; for which equalization currently is not.

Though the implementation of an Equalization program that is more reflective


of province’s revenue raising capabilities was achieved in Budget 2007, the program
still remains overly politicised and does not take into account the effects that the
program has on the economies of the provinces, most notably non-receiving
provinces. Based on this it has become evident, as Thomas Courchene has noted,
that the Equalization program needs to be more reflective of the expenditure
decisions of the receiving provinces and how these policies have reverberating
effects on the Canadian economy as a whole. The absence of these variables in the
construction and analysis of equalization have resulted in the continual expansion of
transfers and has predisposed many of the non-receiving provinces to the economic
difficulties that they are currently facing.
Methodology of Analysis

In order to examine whether or not the provision of equalization has limited the
economic integration of this country through reduced labour mobility, one must
observe the different correlations between various policy variables and equalization
transfers. For the purpose of this analysis, the variables that will be examined and
their possible causalities are as follows:
i. The level of per capita equalization received by a have-not province and the
level of per capita provincial expenditures per capita;
ii. The level of per capita provincial expenditures and the level of migration from
“have-not” provinces to “have” provinces;
iii. The effect of projected income levels on migration between provinces.
The above variables will be examined between 2001 and 2007.

As Finnie Ross (1999) outlines in his paper on labour migration within the
Canadian federation, human movement across the jurisdictional boundaries of a
province are influenced by three incentives/motivators: demographic composition
and social/cultural context; economic opportunities and income possibilities; and
social policies. Due to their importance and intertwining relationship, all three of
these variables will be held into consideration throughout this analysis.

Due to the time and content restraints imposed by the framework of this
paper, its scope, with regards to interprovincial migration, will be limited to the flow
of peoples from the four Atlantic Provinces – Newfoundland, Prince Edward Island,
Nova Scotia, and New Brunswick - to the province of Alberta. Alberta has been
selected as the point of destination in this analysis because it is currently, and has
been since the “oil boom”, faced with the most damaging labour shortage in
Canada. The four eastern provinces have been selected as they are on average the
largest per capita recipients of Equalization, as is shown in Table 2. Furthermore,
these provinces have higher rates of unemployment in comparison to the national
average (Statscan, 2008). Lastly, all provinces of examination have also been
selected due to their cultural and linguistic similarities.

Table 1: Per Capita Equalization Transfers to "have-not"


Provinces, current dollars
thousands
Fiscal Year NL PE NS NB QC MB SK BC
2001-2002 2021 1873 1410 1603 633 1183 200 59
2002-2003 1685 1717 1201 1523 538 1128 106 173
2003-2004 1478 1690 1504 1520 502 1150 0 77
2004-2005 1473 2009 1400 1763 550 1373 655 162
2005-2006 1668 1996 1432 1793 632 1359 83 139
2006-2007 1347 2029 1475 1911 700 1434 0 106
2007-2008 938 2118 1564 1968 931 1543 227 0
2008-2009 1781 2310 1679 2111 1038 1732 0 0
Source: Statscan & The Department of
Finance
Effects of Equalization on Labour Mobility
i. Equalization and Provincial Expenditure:

In order to derive the possible effects of equalization on labour mobility,


potential correlations between the annual amounts of equalization received and
expenditure rates of recipient provinces must be considered. Table 2 shows that the
correlation between equalization received and total expenditures within the four
provinces is relatively strong. Nevertheless, Newfoundland holds a weaker
correlation in comparison to the other Atlantic Provinces due to its rising capacity to
spend relative to other provinces based on its significant foils fuels sector growth. It
is important to point out that because of the Atlantic Accords, both Nova Scotia and
Newfoundland have and will receive equalization transfers that are not in tune with
their current revenue raising capabilities.

Table 2: Correlation Matrix for Equalization and Expenditures


Type of Total Employment Housing Social
Expenditure Expenditure Expenditure Expenditure Services
Province
NF Moderate Weak Weak Moderate
PE Strong Weak Strong Weak
NS Moderate Moderate Strong Weak
NB Moderate Moderate Moderate Moderate

Though total expenditures are an important indicator, it is imperative to


examine specific government spending areas and how they are affected by
equalization, as not all government expenditures will affect migratory rates the
same way. In order to see the effects of equalization on labour mobility, an
examination of specific programs in each province needs to be conducted. However,
in order to maintain the general simplicity of this analysis, only the meso-groupings
of public expenditures will be examined; therefore, the variables of analysis are:
employment related program expenditures; housing expenditures; and social
program expenditures.

A seemingly important indicator would be that of the amount of social


expenditures (social expenditures include both social assistance and social services)
within a recipient province. With regards to social expenditures there is a clear
indication that there is a weak to negative link between the amount of equalization
received by a province and the amount of its expenditure within this policy area.
The clearest example of this relationship can be seen by examining Prince Edward
Island. Only one of the Atlantic Provinces, New Brunswick, holds a relatively strong
correlation; however, this only takes affect after 2004.

As Table 2 shows, at the individual level, that employment expenditure levels


only hold a moderate relationship with the amount of equalization received by the
province. Though all correlations over the timeline of analysis have been designated
as weak to moderate, a strong correlation between the two variables seems to
develop within Nova Scotia and New Brunswick after 2003 and in Newfoundland and
Prince Edward Island after 2004. This occurrence between the two variables can be
examined within the province of Nova Scotia, as is depicted by the growth rates
provided in Graph 1. It is recommended that further examination be conducted on
this relationship (and its variable sub-relationships) within a larger timeframe in
order to scrutinize whether this post-2003 correlation is the rule rather than the
exception.

Out of the variables examined, those designated as housing expenditures,


largely housing assistance expenditures, seem to be the most heavily influenced by
the differences in equalization received per annum. Two of the four provinces
examined hold strong correlations in every year of examination, with the exception
of 2001-2002. Thus, in almost every year within each province, expenditures within
this governmental sector moved in the same direction as the amount of equalization
received. Graph 2 shows how strong this correlation is after 2001 within Nova
Scotia.

ii. Provincial Expenditures and Migration:

Based on the aforementioned information, it would be improper to examine


the effects of social and employment programming on labour migration, as there
seems to be a limited correlation between equalization and this typology of public
expenditure within the provinces of analysis. Thus it is only of benefit, for the
purpose of paper, to examine the possible effects of those expenditure areas that
hold perceivably strong correlations in the previous examination. This level of
analysis will focus on the possible effects of these expenditures on migration from
the Atlantic Provinces to Alberta. It should, however, be noted that housing
programming represent a relatively small portion of total provincial expenditures.
For example, from 2001 to 2007 housing expenditures were accounted for 1.4
percent of total expenditures in New Brunswick and 0.9 percent in Newfoundland
(Statscan, 2008).

Table 3: Correlation Matrix for Expenditures and


Outwards Migration
Type of Total Expenditure Housing
Expenditure Expenditure
Province
NF Weak Strong
PE Weak Moderate
NS Weak Moderate
NB Weak Weak
Labour migration from the four Atlantic Provinces when examined with total
expenditure reveals a peculiar fact; within all provinces, expenditures have raised
consistently since 2001, while outwards migration has increase since 2003. Prior to
2003 it can be seen that expenditures in all provinces had a negative effect on total
outward migration; as from 2001 to 2003 total outward migration decreased from
8,636 to 7,025 while per capita expenditures increased from $8,525 to $9,171
(Statscan, 2008). Nevertheless, outward migration increased exponentially in all
Atlantic Provinces after 2003. Based on these facts it can be assumed that total
expenditures is not a proper variable of analysis as it does not specifically affect
one’s decision to move from one province to the next. Nevertheless, it can be
pointed out that within both Nova Scotia and New Brunswick in 2007 that total
expenditures continued to raise while migration rates fell.

When an individual is contemplating whether or not to move from one


province to another they will examine the benefits of staying in their current
location which include the government expenditures that directly affect their current
relative income. Thus it is important to examine the specific expenditure areas that
are highly visible in the lives of potential migrants as this will come into conflict with
the incomes available in other provinces. This means that those programs that are
largely targeted to lower income groups (those more apt to be structurally or
seasonally unemployed) within society will hold perceivably larger influence on an
individual’s decision making process when contemplating migration from a “have-
not” province to a “have” province.

It can be seen at the aggregate level, when housing expenditure growth is


limited, outward migration increases more rapidly. For example, when aggregate
housing expenditures grew by only 8.3 percent from 2004 to 2006 total outward
migration increased by 48.0 percent during the same time period. This is
predominantly true within the province of Newfoundland as there is a consistent and
pronounced inverse correlation through each year of examination, as is seen in
Graph 3. This relationship, to one extent or another, is also evident within the other
provinces of examination; however, slight deviations occur in each province
between 2003 and 2006.
iii. Outward Migration and Alberta Income levels:
Even though there can be strong correlations derived from housing
expenditures at both levels of analysis, there still occurs, in most examples, periods
where the inverse is true. As migration is principally based on the incentives in
which individuals are faced with, there are other factors at play here besides
government expenditures. One of the, if not the most significant, factors as stated
previously, is that of the possible income that a waits an individual in the potential
province of destination. Thus it is important to see if probable incomes within the
province of Alberta can explain these deviations and to examine the extent of the
influence of this variable.
By examining data on the wage rates in Alberta and the aggregate migration
rates from the Atlantic Provinces it can be seen that migration destined for Alberta
sharply increased after 2003 as average low and low-middle class incomes began to
increase more rapidly. Peculiarly enough this trend only lasts until 2006 when
outwards migration rates from the Atlantic Provinces actually decrease for the year
2007, by almost 2000 people, while wage rates continued to climb. What can
explain this?

It would seem in this case that market based incentives hold diminishing
returns as housing expenditures rose sharply between 2006 and 2007. Graph 4
illustrates that income growth reclined between 2006 and 2007, giving more weight
to other variables. Though wage rates in the provinces of destination will be highly
influential on the incentive bundle that is faced by the individual, its prominence is
limited by the relative size of the other variables. Even though incomes continued to
rise in Alberta, outwards migration growth fallouts from the Atlantic Provinces
occurred as specific government expenditure areas increase significantly; this also
occurs at the same time as aggregate equalization to the region peaks.

Conclusion and Recommendations:

Based on the evidence provided above, one can perceive that, to one extent
or another (largely depending on the policy mix and how much equalization
represents of the total revenues within each province), that equalization may hold
direct (as well as indirect) effects on the fluidity of labour mobility in Canada. Even
though correlation is not necessarily causation, it can be perceived that
equalization, in its current form, may hold negative effects on the ability of labour to
move with relative ease from one province to the next. Thus it is suggested, that
further examination of these and other variables be conducted in order to derive a
better understanding of the link between equalization and labour mobility.

So if equalization is possibly affecting the economic structure of Canada in a


negative manner, what steps could be taken to mitigate these affects without
damaging the other principles at the foundation of the program?

It can be suggested that the Equalization formula take into consideration the
effects of federal transfers on the spending habits of recipients and how these
expenditures effect outwards labour migration. Based on the analysis provided, by
incorporating expenditures which effect labour mobility into the equalization
formula, the Federal Government can signal to receiving provinces that
expenditures of this nature, above a national standard, are not beneficial to the
Canadian economy. Moreover, by incorporating these expenditures into the
calculation process, the Federal Government can also reduce the overall size of
transfers to the receiving provinces. Thus, it is advisable that national averages be
calculated and incorporated into the formula based on the expenditure areas of
concern, in order to create a national bench mark standard. This standard would be
used to reduce the amount of equalization received by a “have-not” province equal
to the per capita amount of its expenditures above this standard in an area of
potential concern.
The incorporation of this bench mark standard into the equalization formula
has many positive attributes that will benefit both the Federal Government and
Canada as a whole. First, the standard should reduce the overall cost of the
equalization program, thus reducing (or at least mitigating) Ontario’s share of the
expanding bill. Second, as Ontario is now among the ranks of the “have-nots”, it will
pressure other “have-not” province to have per capita expenditure levels similar to
that of the “standard province”, making this more equitable. Finally, it will most
likely lead to the improved liquidity of labour mobility between the provinces.

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