Putting the boom and bust in mining wages

Employers and unions in Canada's oil patch seek to take the boom-bust cycle out of labour deals by tying salary gains to oil price performance.

When commodity prices boom, unions can feel their members — with wages tied to contracts signed before prices jump — are standing on the sidelines while their employers enjoy a windfall.

But when those prices go bust, employers absorb a heightened cost blowout risk if their workers' wages were negotiated on the basis of higher commodity prices and revenues.

Building trade unions and construction employers working in the oil sector of Alberta, are trying to break that cycle with an approach that could be replicated in other regions and commodity sectors.

When the two sides sat down in 2010 to negotiate a contract covering 2011-2015, both unions and employers felt bruised by the two preceding four-year contracts. In the first instance, workers saw their employers in Canada's oil sands sector enjoy runaway profits while wages crept up by previously-negotiated increments.

When it came time to negotiate wages for the 2007-2011 contract, unions won fixed annual wage hikes of 6.5 per cent, 5 per cent, 6.5 per cent and 5 per cent.

But then the global financial crisis struck in 2008, sticking companies with robust wage hikes despite plummeting demand and revenues.

Both sides were ready for a fresh approach.

What emerged was a novel but commonsense contract that tied salary gains to the performance of oil prices.

The contract, which covers about 50,000 workers, dictates that when oil prices rise, so do wages. If prices are stagnant or decline, then workers will see their wages frozen or tied to the consumer price index to protect their purchasing power.

But the goal was to ensure workers wouldn't feel left out if prices escalate while protecting employers from labour cost-induced blowouts if prices deflate.

In an interview with Business Spectator, Neil Tidsbury, president of Construction Labour Relations Alberta said there was a “remarkable” correlation between the number of hours worked and benchmark oil prices, making it easy for both sides to see that prices would serve as an accurate gauge for determining wage increases.

“There was ready agreement that we needed to do things differently, that the previous way of doing business didn't generate outcomes that were sustainable,” Tidsbury told Business Spectator.

The first two years of the current deal marked a transition to the formula, so this year has been the first for it to be fully operational.

The formula works like this: wages are reviewed biannually, in January for a May adjustment and in July for a November adjustment.

If West Texas Intermediate oil prices are below $US60 a barrel, then wages will be frozen, as that was identified as a threshold below which projects start to shut down. If prices are between $US60 and $US90 a barrel, then there will be an inflation-only raise. Between $US90 and $US110 a barrel, wages will rise at inflation plus 0.5 per cent; between $US110 and $US125 a barrel wages will rise at inflation plus 1 per cent; and at over $US125 a barrel wages will rise by inflation plus 1.5 per cent.

Beyond stipulating that wages will never be rolled back, annual wage increases were also capped at a maximum of 5 per cent.

In January of this year, the average West Texas oil price for the preceding six months was over $US90 a barrel, so workers received a raise equivalent to inflation plus 0.5 per cent. The consumer price index was at zero, so the raise was limited to 0.5 per cent.

In August, the consumer price index was 2.3 per cent and prices remained above $US90 a barrel, so workers received a 2.8 per cent raise.

Of course, workers would be happier with the five and 6.5 per cent annual wage hikes they saw under the previous contract. But unions, having felt they missed out on the boom during the 2003-2007 contract, seem to be playing the long game. They seemed to work on the basis that employers will retain their work force and with any luck expand it if they feel there is a reduced chance that they will see wage blowouts.

“We probably had all of the right preceding events take place that [led] us to look at this and say, 'Boy, we have to do something different',” Warren Fraleigh, executive director of Building Trades of Alberta (the group that negotiated the deal on behalf of construction unions), told Toronto's National Post newspaper.

Can the formula be adopted by other sectors in other regions? Tidsbury thinks so.

“If I was engaged in, say, potash production, I would be able to find indices that serve as proxies for demand that could form the basis for future wage adjustments,” he said.

Australian resource employers and unions should take note. Imagine the difference on union contract negotiations and the discussion around project cost blowouts if employers and worker representatives could remove the element that has them jockeying with one another to avoid being on the wrong side of the boom-bust cycle.

What Alberta's oil sector building trades companies and unions are doing seeks to prevent contract negotiations from becoming a zero-sum game. Whether they have succeeded will be determined when the two sides return to the negotiating table next year to craft the 2015-2019 contract.