Adapting to a Changing Ontario Economy

November 23, 1995

As the government of Ontario slashes funding for welfare benefits, training, child care and other services for people in need, many middle- class Ontarians who traditionally have been supporters of such public programs now appear to be ready to end their support and go along with the cuts. Many people in this group have gone through several years of economic uncertainty and have become convinced that their insecurity and the government's inability to balance the budget arises from a growing class of "freeloaders and abusers" in the welfare system. They believe that their hard-earned tax dollars are being wasted on people who are not interested in working.

But cutting public spending on transfers and services will do little to address the growing feelings of economic insecurity and mounting government deficits. These problems merely reflect a deeper, more profound change in the province: Ontario is undergoing a process of fundamental economic restructuring. This process has brought with it many benefits such as expanded international trade and rising exports, growing corporate profits, improved labour market flexibility and productivity, and technological advancements. It has also brought new problems.

The labour market and earnings have become polarized. The middle class is shrinking, there is less stable employment (i.e., more temporary and part-time work), more frequent and longer periods of unemployment, and a growing pool of unemployed young people. These changes are also part of the so-called "new economy."

Adjusting to these economic and labour market changes is an even greater challenge now, as all levels of government undertake budget- balancing exercises that involve deep cuts in social expenditures. We should not forget, however, that these social expenditures have supported programs that were designed to cushion the adjustment process. Drastic cuts to these programs now will place more, not fewer, demands on the Ontario treasury over the coming years as Ontarians try to adapt to the economic changes.

The Canadian Council on Social Development (CCSD) recognizes the need to get Ontario's fiscal house in order, but the approach being used by the government is not the way to deal with the deficit because it fails to address the real difficulties that face Ontarians in a changing economy and labour market.

A changing labour market

In response to worldwide economic changes, Ontario's labour market is undergoing a profound restructuring. Improved production processes and technologies, and intensified competition have led to pressures for greater labour market flexibility in recent years. Downsizing among businesses even in the face of record profits and in government operations, and the emergence of "non-standard" forms of work (such as temporary and part-time work, and self-employment) have heightened feelings of insecurity among workers and their families. Today one in three jobs is non-standard and this number is expected to grow in the years ahead.(1)

For some people, the shift to non-standard forms of work can be viewed as an opportunity. More flexible work schedules allow time for leisure activities and family responsibilities, and starting one's own business may lead to greater financial success. But for many other people, the trend towards part-time and temporary jobs is not such a welcome change. Growing numbers of part-time workers (sometimes referred to as the "underemployed") and those in temporary jobs are "involuntary," that is, they would prefer more secure employment. Among part-time workers today, one in three said they took a part-time job because they could not find full-time work, compared to just one in 10 two decades earlier. For those in temporary jobs, six of 10 workers would prefer permanent employment. They have good reason: part-time and temporary workers tend to have lower earnings, fewer benefits and less security than those in traditional full-time, permanent jobs.(2)

Working too much, or not enough?

As the Ontario labour market becomes increasingly polarized, many people find themselves with not enough work, while others have too much. There is a serious imbalance in the distribution of work. In Ontario, the percentage of individuals working less than 30 hours a week has grown, as has the number of people working more than 50 hours a week, but the number working a more standard work-week of 30 to 49 hours a week has shrunk since 1981.

As further evidence of this work polarization, we see growing numbers of people who are unemployed for longer periods of time. The last recession resulted in the loss of tens of thousands of jobs in Ontario. Despite an impressive rebound in economic growth in 1994, almost 10% of Ontario's labour force remained unemployed and with the slow economy in the first half of 1995, another 21,000 jobs have disappeared.(3)

As still more people become unemployed, it becomes increasingly difficult to re-enter the labour market the demand for jobs is simply greater than the supply. In just four years, the average period of unemployment for an Ontario worker has doubled, to 28 weeks. Older workers who are less adaptable to economic restructuring and demands for new skills are now unemployed for an average of 35 weeks

.

Unemployment among Ontario's youth has been particularly high. From a peak of 18% in 1992, the unemployment rate for young people (under the age of 25) is now 16.4% in Ontario.(4) Statistics Canada attributes the drop in this rate not to improved employment opportunities, but rather to an accompanying drop in the participation rate.(5) In other words, growing numbers of young people have become completely discouraged about finding work and they have dropped out of the workforce altogether.

The shrinking middle class

The polarization evident in people's work hours has been accompanied by a similar phenomenon with earnings. As the Ontario economy continues to shift from goods production to knowledge-based industries and services goods industries now account for only one- quarter of the jobs in Ontario, down from one-third a decade and a half ago(6) wages are tied to one's knowledge and skills.

Increasingly, people working in highly skilled, high-knowledge sectors earn much higher wages than their counterparts in lower skilled fields. The traditional low- skilled but well-paid factory jobs that helped foster the growth of the middle class are becoming less common. This is reflected in the changing distribution of people in the top, middle and bottom earnings ranges. The following table demonstrates the shrinking middle class in the province: the number of people in the mid-earnings range is decreasing, while groups at both the top and bottom are growing in size.

Growing inequality

In addition to greater numbers of people at the top and bottom of the earnings spectrum, the gap between the two groups is also growing. In other words, things are getting relatively better for those people who earn the most and getting worse for those who earn the least. Although public transfers and taxes can reduce some of this inequality of earnings, the table illustrates the growing inequality. In effect, there has been a shift in the distribution of income in Ontario from those at the bottom to those at the top.

"Market income" includes income from earnings and investments.
"Before-tax income" includes market income plus government transfers such as unemployment insurance benefits, social assistance and so on.
"After-tax income" includes transfer income after federal and provincial income taxes have been paid.

The impact of falling earnings among families in the lower income groups is reflected by a growing "market gap," that is, the difference between income from earnings and the poverty line.(7) The fact that the market gap is growing indicates that more families are falling further below the poverty line, despite their participation in the labour market. The magnitude of this market gap and the speed with which it has grown are disturbing: between 1981 and 1993, the market gap in Ontario grew from $4.5 billion to $10 billion. Almost 90% of this huge $5.5 billion increase occurred during the last recession alone.(8)

Government transfers can reduce some of the market gap but they have not been able to completely "fill in the hole" left by falling earnings. The "poverty gap" which measures the shortfall between income and the poverty line after government transfers have been accounted for shows that poor families in Ontario still fell $2.8 billion below the poverty line in 1993, even with the help of government transfers. This means that the average poor family in Ontario was $7,517 below the poverty line. As the Ontario labour market weakened during the last recession, government transfers had to work overtime to eliminate almost three- quarters of the gap between earnings and the poverty line. Now governments at all levels are cutting back on these transfers, allowing falling labour market earnings to push more families farther below the poverty line.

More people turning to public transfers

Not surprisingly, many individuals have had to resort to public transfers to fill this growing gap between what they need to survive and what they can earn in the labour market.(9) Yet while unemployment was rising during the last recession, eligibility for benefits under the federal unemployment insurance program were tightened, leaving only 40% of the jobless in Ontario eligible for UI benefits by 1994. As a result, many Ontarians turned to the province for help. Between 1990 and 1994, about 20% of the unemployed in Ontario shifted from receiving federal UI benefits onto provincial social assistance caseloads.(10) The changes to UI and a doubling of the unemployment rate led to a massive increase in the number of people collecting social assistance. In 1991, the percentage of the Ontario population on social assistance surpassed the Canadian average for the first time, a trend that has continued even through the end of the recession.(11)

The so-called "economic recovery" of 1994 obviously did not reduce the need for financial and social supports for many families in Ontario and the labour market has not yet improved substantially. As businesses and governments continue to announce lay-offs, as UI eligibility is scaled back further, and with warnings of perhaps another recession, we can expect the situation for these individuals to deteriorate even more. Now they face the additional burden of cuts to transfers and services.

Investing in people

Services, supports and welfare assistance were designed to help people in need by cushioning the impact of unemployment, for example. These supports and services were also designed to allow people to be independent and to contribute to society and the economy. By scaling back on training programs and child care, for example, many people on welfare are unable to re-enter the labour market. Single mothers provide the clearest example of this dilemma: the government saves a few dollars, in the short- term, by reducing welfare benefits and supports, but in doing so, leaves these women with few means of escaping the welfare system and adds to the attendant long-term costs of raising children in poor conditions.

The cost of child poverty

When families face financial hardships, when jobs are difficult to find, welfare rates are cut, and community services are slashed, it is ultimately the children who pay the highest price. It seems self-evident that poor children live in poor families almost 40% of welfare recipients are children.(12) The recent social assistance cuts imposed by the Ontario government will simply exacerbate the high levels of child poverty in the province. One in five children in Ontario already lives below the poverty line. We can expect that number to increase.

There are definite economic costs to allowing one-fifth of a generation of kids to live in poverty.(13) Poor children are at a greater risk of health, psychiatric and behavioural problems than non-poor children. They have more difficulties in school and they are more prone to substance abuse. Given these problems, it is not surprising that poor children are disproportionately represented in the young offenders system. In short, poverty creates an increased burden on the educational and health care systems and on law enforcement. Since it is the Ontario government's stated preoccupation to reduce costs, it seems ironic that cuts are being made in areas that will require expensive rehabilitative and crisis programs to be developed to deal with future problems.

Looking ahead

Cutting supports to society's most vulnerable members and increasing the income inequities among its citizens is difficult to justify on social and moral grounds. It is equally difficult to understand in strict economic terms. Certainly most Ontarians would not want to live in a society where a large portion of the population lives in poverty. The economic costs of doing so, while not immediately obvious, are nonetheless real and they warrant attention from even those who have considered themselves sheltered from the problems of poverty. There is a growing body of international evidence that an equitable income distribution and low levels of poverty are positively related to a nation's economic progress.(14)

Clearly, a society that values its citizens as worthy of investment is more likely to reap long-term social and economic benefits than one that views people as mere consumers and competitors. Under a purely market- driven economy, the inequitable distribution of social and economic goods leads to enormous inefficiencies: large portions of the population are marginalized and cannot contribute to the growth of the economy and the betterment of their society. Now more than ever, the ability of industrialized nations to prosper will depend upon the capabilities and knowledge of their workforces. The direction the Ontario government is taking runs counter to this reality.

The Canadian Council on Social Development is not advocating for the status quo in Ontario. It is clear that changes in the labour market and the economy require social and economic reforms. But the need for reform or change does not mean that the answer to our problems is simply to dismantle government, to cut back on investments in people, or to put blind faith in a global economic model. Rather, reform and change should mean adapting our social programs and economic policies to meet the challenges presented by the new global economy. The government of Ontario, not unlike other governments in Canada, must play a lead role in capitalizing on the benefits of new technology, increased productivity and expanded international trade, while tempering the negative side effects of these changes. By investing in people and by implementing policies that recognize both immediate deficit-reduction objectives and longer term costs and benefits, the province of Ontario can achieve a balance between social and economic progress and long-term prosperity.

References

1.Grant Schellenberg and Christopher Clark, Temporary Employment in Canada -- Profiles, Patterns and Policy Considerations, Canadian Council on Social Development, 1995.

2.Grant Schellenberg and Katherine Scott, Involuntary Part-time Employment in Canada (forthcoming), and Schellenberg and Clark, Temporary Employment in Canada.

3.Statistics Canada, Perspectives on Labour and Income, Catalogue 75-001 Quarterly, Autumn 1995.

4.Ibid.

5.Ibid.

6.Ibid.

7.See David Ross, Richard Shillington and Clarence Lochhead, Canadian Fact Book on Poverty -- 1994, Canadian Council on Social Development, p. 85.

8.Centre for International Statistics, Ottawa: Canadian Council on Social Development, 1995.

9.The poverty line refers to Statistics Canada's "Low-income Cut-offs" (LICOs) which are said to reflect the level of income below which individuals and families live in straitened circumstances". The poverty line reflects family size and community population in establishing the cost of living and the Cut-offs. For a more detailed explanation of Statistics Canada's LICOs and other poverty lines, see Ross, Shillington and Lochhead, Canadian Fact Book on Poverty -- 1994.

10.Government of Ontario, 1995 Ontario Budget Plan, Queen's Printer for Ontario, 1995, p. 29.

11.Statistics Canada, Catalogue 91-002, Vol.8, No.2, 1995.

12.Human Resources Development Canada, Basic Fact Sheets on Social Security Programs, November 1994, p. 13.

13.David Ross, Mark Kelly and Katherine Scott, Child Poverty: What are the Consequences?, Canadian Council on Social Development, 1995. Also see: Campaign 2000, Child Poverty in Canada -- Report Card 1994.

14.Lars Osberg, The Equity-Efficiency Trade-off in Retrospect" in Canadian Business Economics, Spring 1995.