Commentary,  Inflation,  Trade Unions,  Wages

Real Wages are Recovering… and That’s Good News!

The beginning of 2024 brought some good labour market news for a change: average real wages in Canada increased in 2023, reversing some of the damage from post-COVID inflation. After two years of lagging well behind inflation, wage growth picked up in 2023, reaching almost 5% for the year. Combined with a marked slowdown in inflation (to just under 4% for the year), that produced a 1% increase in the real purchasing power of average wages.

Real Hourly Wages in Canada line graphReal wages are higher than when the pandemic began, and have approximately regained their pre-COVID trend. From 2011 through 2019, real wages grew by slightly less than 1% per year. The 2023 rebound in real wages left them at a point just slightly below where they would have been if the pandemic had not occurred, and real wages had simply continued growing at that 2011-19 pace.

The temporary spike in wages (both nominal & real) that occurred in 2020 was a composition effect: resulting from the disproportionate loss of lower-wage jobs in the lockdowns (which meant that the average wage for those workers who remained employed seemed higher). That artificial effect was unwound as those low-wage industries reopened after the lockdowns. But then inflation roared to life, and started to further undercut real wages—until 2023.

It is interesting to note that the median real wage (earned by workers at the exact mid-point of the income distribution) grew faster in 2023: by 2.5%. That implies a slightly narrowing of wage inequality in Canada’s labour market last year, with lower-wage workers getting slightly stronger increases. In the long-run, however, median wages have increased more slowly than average wages, indicating that higher-income workers (including salaried professionals) have received disproportionate gains (thus pulling up average wages faster than median wages).

The encouraging growth in real incomes for workers in 2023 confirms that the efforts of Canadian workers to protect their purchasing power are having effect. This includes the efforts of unionized workers to offset previous real wage cuts through collective bargaining demands and more frequent strikes. On average, however, real wages grew more slowly for unionized than non-unionized workers – mostly because many union members have not yet had a chance to renegotiate their contracts since the take-of of inflation in 2021 and 2022. As more contracts expire and are renegotiated, we can expect continued challenges in contract talks, as workers strive to both make up for past real wage losses, and protect their real wages against continued expected inflation in the years ahead.

Moreover, the real gains experienced last year were not universal. Especially in public sector occupations (including education, health care, and public administration), nominal wage gains barely matched even the slower inflation experienced last year. Indeed, in education average real wages fell again in 2023 (by two-thirds of a percentage point). This means that public sector workers continue to suffer from accumulated real wage losses since the pandemic hit, with purchasing power up to 4% lower than it was in 2019.

Real Wage Change 2019-2023 bar graphOf course, what is good news for (many) workers will be interpreted as a danger sign by employers and the Bank of Canada. There is no evidence that wages caused the outbreak of post-COVID inflation. But this encouraging wage growth will nevertheless be used as an excuse to continue suppressing domestic growth and job-creation, including by keeping interest rates at current high levels for longer. That may tip Canada into an official, ‘technical’ recession (traditionally defined by two consecutive quarters of negative real GDP growth). But in the Bank of Canada’s view, that is a worthwhile price to pay if it helps to restrain wages and thus restore lower inflation.

We can expect the complaints about wages, and predictions of imminent but mythical ‘wage-price spiral’, to get louder in the coming months. However, real wages are only catching up to inflation, not causing it, and regaining long-term trends. Workers have a right to expect their real standard of living to improve gradually over time, on the strength of technology, efficiency, and strong labour force participation. Instead of scapegoating workers, macroeconomic and monetary policy should target the true causes of post-COVID inflation—and that clearly has not been labour.

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.