A recent Supreme Court of Canada decision on a labour regulation quietly flew under the radar. The 6-3 decision confirmed that, under Canada’s Labour Code, employers operating in federally regulated industries (such as airlines, broadcasters and banks) cannot dismiss non-union employees without first establishing a clear case for dismissal, even if employers offer a generous severance package.
On first blush, the decision appears to “protect” employees from arbitrary dismissals. In reality, it solidifies a regulation that ultimately hinders employment opportunities and overall prosperity, hurting workers in the process.
In general, when labour regulations are overly restrictive, they impede the ability of employers and workers to adjust to changing economic conditions such as a weakening economy or the introduction of new technologies that improve how products are made or how services are delivered.
The mark of a dynamic economy is one where employers and workers can quickly and easily respond to market changes.
For workers, a dynamic economy affords them greater opportunities to find jobs that better match their preferences for compensation, working conditions and career prospects. To create those opportunities, employers must be able to reallocate resources, changing their mix of capital and labour, when a chance to enhance operational efficiency arises.
Research confirms this. Countries with less-restrictive overall labour regulations have better job-creation records and experience faster-growing economies. While restricting the ability of employers to dismiss employees is just one type of restrictive regulation, the Supreme Court’s decision nudges Canada in the wrong direction.
A comprehensive survey of the literature, released in 2013 by the Organisation for Economic Cooperation and Development, found that restrictions on dismissing employees slow down the adoption of new technology and impede recovery from economic shocks.
These restrictions also encourage the use of temporary contracts instead of permanent positions, and tend to benefit labour market “insiders” at the expense of new entrants with less experience, including young workers.
Fewer job opportunities
These negative consequences ultimately translate into fewer job opportunities. A 2012 study (Labor Market Flexibility and Unemployment: New Empirical Evidence of Static and Dynamic Effects) by the International Monetary Fund examined the impact of labour market regulations in 97 countries from 1980 to 2008 and found that, along with other restrictive regulations, stringent rules on hiring and firing result in higher levels of unemployment.
And, again, younger workers breaking into the labour market are particularly hard hit by restrictive labour regulations, as explained in the 2014 article “Fiscal adjustments, labour market flexibility and unemployment” in Economics Letters.
Given concerns over youth unemployment, the Supreme Court decision is particularly troubling. If the federal government wants to help young workers, making labour regulations less, not more, restrictive would be a better approach.
Fortunately, the Supreme Court decision interprets existing law, so the current policy is not set in stone. Parliament is free to change the rules for dismissal and make them less restrictive.
More broadly, the federal government could reform other labour regulations to allow for a more flexible labour market. This would better serve workers by facilitating a more prosperous and dynamic economy.
If there’s one positive from the recent Supreme Court of Canada decision, it’s how it’s shining a light on federal labour regulations — an issue that receives little attention. The government has lots of room to improve those regulations in a way that better serves workers.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is policy analyst at the Fraser Institute in Vancouver.
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