Académique Documents
Professionnel Documents
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By Sean McConnachie
Introduction:
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.
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.
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.
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.
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.
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.
References:
Advisory Panel on Fiscal Imbalance. 2006. Reconciling the Irreconcilable: Addressing
Canada’s Fiscal Imbalance Ottawa: The Council of the Federation.
Canada. 2007. ASPIRE: To a Stronger, Safer, Better Canada. Tabled March 19th, 2007.
Ottawa: Department of Finance. Cat. No.: F1-23/2007-3E
Gibbins, Roger. 2007. Federalism in the 21st Century: Defining the Common
Economic Space. Montreal: Policy Options 28(3) P. 11-21
Usher, Dan. 1995. The Uneasy Case of Equalization Payments. Vancouver: The
Fraser Institute.