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Sunday, October 2, 2011

Job piracy in Canada, Australia, and the United States

As I mentioned in August, my article "Regulating Investment Attraction: Canada's Code of Conduct in Comparative Perspective," has just appeared in the September issue of the journal Canadian Public Policy.

Job piracy (using subsidies to induce the relocation of an existing facility) is a big problem in the United States. New York City and Kansas City have been subject to repeated raids by neighboring states, and a Good Jobs First study this summer documented extensive job piracy in the Cincinnati and Cleveland metropolitan areas. Two voluntary anti-poaching agreements among groups of states were complete failures.

In the early to mid-1990s, Canada was seeing large-scale job piracy as well. Crown Life Insurance moved 1200 jobs from Toronto to Regina, Saskatchewan, in 1991, receiving a C$250 million loan guarantee to do so. New Brunswick was handing out millions of dollars to call centers to relocate there, including C$11 million to get United Parcel Service to consolidate 870 jobs from three other provinces in Canada. With this background, British Columbia insisted that a ban on job piracy be placed in the 1994 Agreement on Internal Trade signed by the Canadian federal government, all 10 provinces, and the Yukon and Northwest Territories. Though there were other provisions in the Code of Conduct on Incentives, the piracy ban was the only one that was legally binding. But it turned out to be not binding enough.

The United Parcel Service subsidy was subject to a complaint by British Columbia against New Brunswick in 1995. But weak dispute resolution rules in the larger Agreement meant there was no true enforcement mechanism. New Brunswick suffered no consequences, although it eventually got out of the poaching game when Premier Frank McKenna retired. However, since 1995, there have been at least eight other instances where various provinces (Nova Scotia, Prince Edward Island, Quebec, and Ontario) all gave subsidies to companies to move existing operations. One of them, Clarke, Inc., has been featured for years on the website of Nova Scotia Business, Inc., even though it is a prima facie violation of the Code of Conduct. But without a complaint from Ontario, nothing can happen -- and Ontario tried to raid Nova Scotia unsuccessfully to obtain the headquarters of grocery chain Sobeys.

The Code of Conduct does not appear to have had much success. The best that can be said about it is that the relocations subsidized were much smaller than those of the 1990s. Clarke, at 95 jobs, was the largest; the others were significantly smaller than that. In the meantime, the Agreement on Internal Trade has strengthened its dispute resolution process to make violators subject to fines up to C$5 million. It seems possible that a large-scale subsidized relocation would provoke a complaint under the Code.

An interesting contrast is Australia, which has a voluntary anti-piracy agreement that includes five of the country's six states (Queensland is the non-participant). Besides banning job piracy, the Interstate Investment Cooperation Agreement also encourages states to consult with each other when a company tries to play them off against each other. Whereas the National Governors Association says U.S. states have the right to do this, in Australia the states really do consult with each other to reduce what I describe as an information asymmetry in bargaining between governments and companies. Even though there is no enforcement mechanism at all, there have only been a couple of violations since the Agreement was first adopted in 2003. The reason for its relative success seems to be that the five states' politicians genuinely believe that job piracy is bad policy, a view that has been promoted by a federal government research body, the Productivity Commission, for at least 15 years.

The lesson for the United States is that we should try to ban job piracy because it obviously has no benefit for the country as a whole. In the U.S., of course, we have a stronger dispute resolution process than Canada's Code of Conduct does: If Congress passed a law against interstate job piracy, it could be enforced in federal court. The problem is that too many state politicians don't agree that poaching is a bad policy; they need to be educated or replaced.

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