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Is there a worker shortage in the United States, and might that same phenomenon emerge in Canada?

Or, to look at it a different way: Is there a shortage of $5 Champagne? Prices matter and should reflect supply and demand, both for Champagne (sadly, scarce for those wanting to pay $5) and in labour markets, looking to be increasingly tight, at least in the United States.

Much of the discussion about U.S. worker shortages has focused on the idea that government benefits are too generous – people are being paid to stay at home, or so goes the critique. The U.S. Chamber of Commerce has sounded the alarm about worker shortages, even though there are 7.6 million fewer people working than before the pandemic.

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Sure, some of those 7.6 million people might prefer government benefits to work, but the assertion that lower-wage workers are basking on their couches may be missing the point of some fundamental transformations under way in the postpandemic economy in the United States, and in Canada.

First, pandemic benefits do allow workers to be at least slightly selective about job offers. In other words, someone who is unemployed doesn’t need to lunge at their first job offer just to keep food on the table. That’s part of the reason why Canada has programs such as Employment Insurance. And it benefits the wider economy if a worker is able to find a job that makes the most of their skills.

But one thing that makes this period of economic turmoil different is its duration: The pandemic has lasted 15 months, with some businesses all but shut down for a large stretch of that time. Income supports, whether those paid directly or indirectly through wage subsidies, were designed to allow those workers to stay home and to stay safe. It also may have given them the opportunity to retrain, observes Wilfrid Laurier University economics professor Tammy Schirle. A recent study from Pew Research found that two-thirds of unemployed Americans had contemplated a change in occupation or field of employment.

Retrained workers who jump to higher-paying jobs could enhance the bargaining power of their former cohort, Prof. Schirle says. A reduced supply of labour for traditionally low-paying industries would then tend to push up wages. In Canada, average weekly earnings have risen from prepandemic levels, up 7.6 per cent from February, 2020 to March, 2021, according to the most recent Statistics Canada data. But that increase looks to be more of a result of a relatively larger decrease in lower-paid jobs compared with higher-paid positions.

But there is already some evidence of wage pressures in the United States. Wages rose 2 per cent in May compared with a year ago. And some service-sector employers are offering signing bonuses, even free college tuition.

That’s a good thing for workers, and is a sign that the forces of supply and demand are starting to function more normally. “It’s the free market working,” says Prof. Schirle.

Taxing questions

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A recent Tax and Spend newsletter on how effective targeted taxes are in reducing the consumption of undesirable goods – often called sin taxes – sparked a question from Paul Blythe of Thornbury, Ont., about how carbon pricing performs on that same question. Economists use a measurement called the price elasticity of demand to gauge the effect of increased prices (including those resulting from tax increases) on purchasing decisions.

For inelastic goods, demand changes by a smaller magnitude than a price change. For elastic goods, demand changes by more than a given change in price. The price elasticity of demand calculates a figure that reflects that relationship; an elasticity of -0.2 would mean demand falls by 2 per cent if prices increase 10 per cent, a case of price inelasticity. An elasticity of, say, -1.3 would result in demand dropping 13 per cent if prices rose 10 per cent.

Tobacco is relatively price inelastic, with an elasticity of -0.4. Taxes on sugar-sweetened beverages, however, are much more price elastic, with an elasticity of -1.2. In part, that disparity reflects the relative abundance of substitutes for sugar-sweetened beverages. Diet ginger ale may not be exactly the same as its sugared counterpart, but it’s pretty close, in taste, price, branding and availability.

That’s not really true of tobacco; nicotine patches and gum, whatever their health merits, aren’t a substitute for a cigarette. There’s also the question of addiction, making tobacco consumers even less responsive to price. Interestingly, research shows that price elasticity for tobacco rises over time, as tobacco-addicted consumers decide to kick the habit.

As it turns out, motor fuels are more like tobacco than soft drinks. Demand for motor fuels is even less elastic than for tobacco, at least in the short term. In an e-mail, University of Ottawa economist Nicholas Rivers wrote that motor fuels have a price elasticity in the short run of around -0.2 (half that of tobacco), which reflects the reality that a consumer’s vehicle and place of work aren’t likely to change quickly. There is some research that shows higher elasticity in cities with robust public transport. As with artificially sweetened sodas, the availability of substitutes matters.

But what is true in the short run isn’t true in the long run. Prof. Rivers says it’s more difficult to determine that longer-run elasticity, but he estimates it ends up between -0.5 and -1. Either way, rising gasoline prices, including those from government policy, do eventually reduce consumption. Consumers will choose vehicles that use less gasoline, or go electric, or opt to use public transit. Homes can get energy upgrades. None of those changes happen immediately.

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One last factor that could increase the impact of carbon pricing on the price elasticity of motor fuels (and other fossil fuels): Consumers know there are years of price increases to come. That means they can factor in those future increases, not just current prices, when making long-term purchase decisions. A 2016 research paper from the University of British Columbia found that permanent price increases from taxes had three times more impact on demand than price increases seen as transitory.

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Power games: Ontario plans to spend $700-million more on electricity subsidies in fiscal 2021-22 than it does on long-term care, with that $6.5-billion outlay underscoring the problems of rising power costs over the past decade and more, says a new report from the C.D. Howe Institute. The authors urge the adoption of several market-based reforms aimed at reducing peak demand – including the use of means testing for residential subsidies, or at least a cap on the number of kilowatt hours subsidized.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

Sign up for the Tax and Spend newsletter here

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