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Kevin Milligan - Let’s Face Facts on Natural Resources

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From: Kevin Milligan

To: Canadians Concerned with Inequality

Date: May 30, 2018

Re: Let’s Face Facts on Natural Resources

Opinions on pipelines are flowing around Canada far more quickly than the oil. The ultimate decisions on natural resource projects, however, ought to derive from facts. As an economist studying income inequality over the last 15 years, I can offer a key fact to the debate. The evidence shows that nothing has contributed more than natural resources to buttressing the Canadian middle class against the rapidly changing global economy of the 21st century.

The importance of resources to middle-class incomes is most clearly seen by looking at a simple measure: the earnings of the middle worker in the economy (the median). Between 2000 and 2015, Canadian median earnings rose by just 6 percent after inflation, or less than half a percent a year. However, underneath this national number lie vast differences across provinces. While Alberta saw earnings growth of 27 percent and Saskatchewan topped 44 percent, Quebec only saw growth of 6 percent and Ontario suffered a loss of 4 percent. When researchers have pushed beyond these basic comparisons, the same essential fact holds up: Without income derived from the resource boom, the well-being of the Canadian middle class would be much worse than we’ve experienced.

The impact of natural resources is not just on those who work directly for natural resource companies. There are large wage-spillovers to others working in resource communities in construction, transportation and services. Moreover, resource-derived tax dollars fill government coffers to support strong compensation in middle-class public sector jobs in nursing, education and transit. What’s more, these benefits don’t only help provinces with plentiful resources, since our equalization formula uses the federal purse to top up provinces without comparable resource-revenue streams.

We also must count the Canadians living in First Nations communities near resource developments. In British Columbia since 2009, we have developed a system of Economic and Community Development Agreements that share resource revenue with nearby First Nations.

Around the world, the relentless pressures of technology are hollowing out middle-class employment, leading to stagnating middle-class incomes and exacerbating social tensions. These same pressures appear in Canada too, but resource development has allowed the Canadian middle class to push back on these pressures better than almost any other advanced economy on earth.

The stakes we face are high. Ensuring that Canada does its part in limiting climate change imposes a transition on our economy and transitions raise fears about costs and consequences. To maintain support for climate initiatives, we need to make sure that any burden of transition is shared fairly and that growth in the economy is felt by everybody in society.

The polarizing alternatives to our social model can be seen rising in other countries, and Canada should fight hard to avoid that fate. While other policy tools, such as progressive taxation or the minimum wage can moderate unequal incomes to some extent, the overall prosperity of the Canadian middle class depends much more on good jobs than small policy shifts.

Of course, economic concerns should never be the only factor considered in resource development. Credible and complete plans for environmental safety, climate change mitigation and appropriate First Nations participation must be given full weight in any decision.

But the economics matter, too. As Canadians contemplate the current pipeline debate, we need to take full account of the consequences of erecting barriers to efficient transportation of resources to market. The Canadian economic evidence of the 21st century indicates that depriving Canadians of resource revenues means diminishing the income source that has best shielded the Canadian middle class from the harsh economic forces that are increasing inequality in other countries. For Canadians concerned with inequality, the equalizing effect of resource development on our economy is too strong to ignore.

Kevin Milligan is professor of economics, UBC Vancouver School of Economics, and a Fellow-in-Residence at the C.D. Howe Institute. 

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.

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