Commentary,  Macroeconomics,  Wages

Wages Gain Steam, But Not Enough to Keep Up With Inflation

The latest employment data from Statistics Canada confirm that Canada’s post-COVID recovery remains strong. The unemployment rate in March fell to 5.3%, the lowest since Statistics Canada began its monthly labour force survey in 1976. 

Another positive sign was an uptick in the growth of average wages. Hourly wages grew by 3.4% in the year ending in March, and weekly wages grew by 3.9% in the same period (weekly wages grew faster than hourly wages thanks to increases in full-time work and average hours of work). That represents a modest acceleration in wage growth from recent months. However, the pace of wage growth has really just returned to normal pre-pandemic standards. In fact, wages were growing faster than that (over 4% per year) in the second half of 2019, before the pandemic hit.

The bad news is that wages continue to lag well behind inflation this year. Consumer prices were up 5.7% in the 12 months to February, and inflation will probably rise higher in coming months. That implies a reduction in real wages for Canadian workers of over 2% in the last year alone, and more to come.

The surge in inflation is clearly due to factors that have nothing to do with wages: including supply chain disruptions, the shift in demand toward goods from services, and now the energy price shock arising from the war in Ukraine. This cannot be described as a ‘wage-price spiral.’ Others have profited from the current inflation (such as energy companies and property developers). By protecting themselves and demanding catch-up wage increases (perhaps through a cost-of-living adjustment, or COLA), workers are not causing inflation – they are just preventing a permanent transfer of income from themselves, to those who are being enriched by higher prices for energy, housing, and other key commodities.

Geographically, wage gains were spread across most of the country. It is interesting that Ontario, Manitoba, and Alberta had the weakest wage growth of all provinces. These are three provinces where harsh caps on public sector wage growth (held to 1% in Ontario under Bill 124) are dragging down overall wage trends.

Wage growth has been much stronger in goods industries (5.2%) than in services sectors (3%). This is consistent with the overall shift in demand toward goods from services during the pandemic. It also parallels the fact that price inflation is higher for goods than for services (up 7.5% over the past year, versus under 4% for services).

Especially strong sectors for wage growth include manufacturing, professional and business services, and wholesale trade (warehouses, etc.), where wages grew 7-8% over the last year.

Surprisingly, the hospitality sector had among the weakest wage increases in the whole economy: just 1.4% on an hourly basis over the last year. This is despite loud complaints from employers about their so-called “labour shortage.” Clearly, these employers have not yet learned that if they want to recruit and retain more workers, they should increase pay and benefits. On a brighter note, weekly earnings in hospitality grew more strongly: up 4.2% in the last year. That suggests employers are offering longer (and hopefully more regular) shifts to attract workers, rather than lifting hourly pay.

In sum, the new wage data shows workers are in a somewhat stronger bargaining position, thanks to strengthening labour market conditions and the shift in employment toward higher-paying industries and occupations. However, wages are still lagging far behind inflation. The surge in inflation has nothing to do with their wages, and workers are now struggling to keep up. 

We cannot expect tighter labour market conditions to magically and single-handedly solve Canada’s wage problem. We also need stronger institutional supports for wages (including higher minimum wages, stronger collective bargaining, and an end to public sector pay caps) if wages are to keep up with inflation.

Centre for Future Work Director Jim Stanford has discussed these issues in various recent media interviews, including this story in the Toronto Star by Rosa Saba, and a feature interview on AM640 Radio with host Alan Carter.

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.