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Non-viable businesses need an"off-ramp"

Throughout the pandemic, many small- and medium-sized businesses have weathered the storm, thanks to federal government help. In his deputation to Canada's federal Industry Committee, David Macdonald says it's time to give those businesses an "off-ramp".

June 22, 2022

3-minute read

Watch Senior Economist David Macdonald's June 21 testimony at the House of Commons Standing Committee on Industry and Technology here. (Starts at 16:28:52)

The last two years have been a difficult time for small businesses. Public health shutdowns resulted in rotating months without business and rotating worker layoffs. Businesses across Canada received unprecedented government support through the wage subsidy, rental subsidies and Canada Emergency Business Account (CEBA) loans. Business supports represented the largest government spending category during the pandemic, with worker support coming in second and health care expenses in a distant third place.

Now the problem for businesses isn’t applying for government support but, rather, finding employees to help customers who are lined up out the door. It is important to point out that there is a clear relationship between the wages being offered for new jobs and the job vacancy rate in Canada. As businesses offer higher wages for positions, fewer of those positions remain vacant. For instance, offering $5 more an hour will reduce the job vacancy rate by three percentage points.

Furthermore, workers in hard-hit sectors, like food and accommodation, who were laid off in the initial months of the pandemic weren’t idle. Instead, they used CERB benefits to move into other sectors that remained open and needed workers. This shift into other sectors was largely complete by the end of 2020. The net result: when the economic reopening happened in earnest in the fall of 2021, these workers were no longer available to fill previous positions because they were already working elsewhere, likely at higher wages.

Expansion of the Temporary Foreign Worker program has been the most recent federal government answer to high job vacancy rates. Specifically, the government allocated new funding to process more applications faster. Workplaces can now have 20% of their workforce comprised of Temporary Foreign Workers, up from 10%. Workers can be kept much longer—up to 270 days—and Temporary Foreign Workers will be allowed in areas where unemployment rates exceed 6%. In essence, the last budget effectively reversed the 2014 clampdown on the usage of Temporary Foreign Workers following the widespread use of the program by fast-food chains.

The danger of this expansion is that it will suppress workers’ wages, which would have otherwise risen to attract new workers.

Workers’ wages have risen by 3.9% in the past year but this is well behind inflation, which has risen 6.8%. More Temporary Foreign Workers will work to suppress wage gains, particularly for lower-skilled workers.

For Temporary Foreign Workers who come to Canada for work, the program, as structured, creates dangerous power imbalances in favour of the employer. The basic workers’ rights that Canadians enjoy are either explicitly or effectively denied to Temporary Foreign Workers. These include: the right to change jobs, the right to ask for higher wages, the right to join a union, the right to access Employment Insurance, the right to effective complaint mechanisms. Keeping wages low by importing workers who have been stripped of basic workplace rights is inconsistent with the government’s strategy for an inclusive labour market.

As a country that welcomes a diversity of immigrants, a better approach to obtaining new workers would be to accelerate the process for accepting new Canadians. These new Canadians can, and should, be drawn from the pool of Temporary Foreign Workers who would prefer to live in Canada permanently. Without the suppression of rights inherent in the Temporary Foreign Workers program, new Canadians are freer to bargain for higher wages and better working conditions.

There is no doubt that higher wages will render some low-margin employers incapable of competing post-pandemic. They need an "off-ramp"

For businesses, the reality is that bankruptcy rates were far lower during the pandemic, entirely due to federal supports. A well-functioning economy is one that experiences the renewal of businesses where some close and new ones take their place. The closure of one business frees up resources in the form of space, workers and equipment for new businesses that may be more viable. This is a desirable and necessary feature of any economy.

Government and private sector loans that have been made during the pandemic have substantially raised debt levels in the business sector. For some businesses, there may not be a viable path forward, particularly with rapidly rising interest rates. For those businesses, we need to accelerate, not delay, bankruptcy to settle obligations and, hopefully, allow entrepreneurs to go on to start new businesses in the future. There needs to be “off-ramp” for businesses that are no longer viable.

Finally, in this period of inflation, workers need the ability to bargain for higher wages to try and keep pace with rising prices. Those wages, particularly for lower-skilled workers, should not be suppressed through government policy. At the moment, they are.

These remarks to the Industry Committee have been edited for clarity.

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