Higher wages do not materialize by government fiat

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Mark MilkeWhenever some group claims that wages can be artificially boosted via government intervention, as one Ontario lobby group recently did, ask them this question: Can boats on a dry California lake float higher without mountain snow-packs first melting into rivers and lakes? If their response is “obviously not,” ask this follow-up query: Then how can incomes float higher without massive in-flows of capital, of private-sector money, into an economy?

In the private sector, higher incomes result in part from the arrival of capital, which leads to the construction of factories, hotels and restaurants; the creation of financial services; new technology and machines (such as drilling wells), and much more.

Innovation and higher productivity also help boost incomes. As businesses and the people they employ become more productive, higher wages ensue. If a company produces 20 per cent more widgets this year compared to last with the same number of employees, it has room to hike wages.

But the trick is to first get capital. Absent that, governments can try and artificially boost wages but only at the expense of higher prices and lost jobs.

In recent years, Alberta has been the most popular province for attracting private sector capital.

Between 2004 and 2013, of the $1.75 trillion in private-sector capital investment available to provinces (excluding residential construction), Alberta scooped up more than one-third (35 per cent). Ontario, with a much larger population, attracted just under a quarter (24 per cent).

On a per worker basis, the 2004-2013 average reveals Ontario’s lack of attractiveness to capital investment. The annual average for private-sector investment in Ontario was just $9,709 per worker. Only two provinces, Prince Edward Island and Quebec, had weaker numbers.

Meanwhile, the top destinations for investment per worker were Alberta ($46,439), Saskatchewan ($35,952), Newfoundland and Labrador ($27,129) and British Columbia ($14,150).

That brings us back to wages.

Over the past decade, the provinces with massive private-sector capital inflows saw their average weekly wage rates soar.

According to Statistics Canada, in 2004 (all figures adjusted for inflation) Alberta’s average weekly wage rate was $858, followed by Ontario ($847), B.C. ($776), and Saskatchewan ($754) while Newfoundland and Labrador was near the bottom of the pack at $710.

In 2013, Alberta was again on top with a weekly wage rate of $1,062, followed by Saskatchewan ($924), Newfoundland and Labrador ($923), Ontario (now in fourth place at $901) and B.C. ($882).

Of note, while weekly wages between 2004 and 2013 jumped by $213 in Newfoundland and Labrador, $204 in Alberta, $170 in Saskatchewan and $106 in B.C., Ontario’s rise in weekly wages since 2004 amounted to just $54.

Some might argue that Newfoundland and Labrador and the western provinces were lucky with oil, gas and potash; the world wanted those resources and so of course investment dollars poured in.

But that assertion misses a key point: oil, gas, potash or not, private money is not forced to flow into jurisdictions where the investment climate is uncertain.

Venezuela has oil. But outside investment long ago dried up due to a variety of investment-discouraging government actions under then-president Hugo Chavez, ones which have continued under his successor. They include politicized governance, lack of secure property rights, arrests of opposition members, an insecure currency, and a failing legal system, among other issues. Such realities and the lack of sensible policy matter to investment flows. Nothing is automatic.

So back to Ontario and calls for higher wages. The three most western provinces didn’t succeed in boosting incomes by luck or by law – as in demands from politicians via the legislature; they made their provinces attractive destinations for capital. Governments can try and boost wages by fiat. But absent permanent massive inflows of capital, you might as well demand boats float higher on dry lakebeds.

Mark Milke is a Senior Fellow at the Fraser Institute and author of Go West, Young Adults: The 10-year Western Boom in Investment, Jobs and Incomes.

Markis a Troy Media Thought Leader. Why aren’t you?

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