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Is Canada’s Economy Wage-Led?

The parenthetical reference to Canada in my last post prompted several good comments. This post attempts to summarize and address them.

Dr. Stockhammer has co-authored a paper with estimates for Canada, but he would be the first to note that they are mechanical and not necessarily relevant to policy. He finds that Canada’s domestic economy is wage-led, with a higher wage share increasing consumption by more than a lower profit share might reduce investment.

Even if these estimates are not statistically significant, they are consistent with other domestic economies. But the key question is whether a negative relationship between wages and net exports makes the overall economy profit-led, as Stockhammer found for Austria.

Canada is neither as small nor as open. Gross exports as a share of GDP are now around 30% for Canada versus 50% for Austria. And as a clever student once pointed out in the PEF essay contest, such gross figures significantly overstate the importance of exports to GDP.

Wages have essentially no effect on the “competitiveness” of Canada’s mineral exports. Furthermore, while Austria has the same currency as its main trading partners, Canada’s flexible exchange rate should mitigate relative changes in cost competitiveness.

However, the relevant variable is not exports, but net exports: exports minus imports. There is no doubt that imports would comprise an appreciable fraction of the additional consumption from higher wages and/or income redistribution. Even if exports remained unchanged, higher imports would mean lower net exports.

On the other hand, imported capital goods would account for much of any additional investment arising from a higher profit share. Without further empirical work, I am not sure we can conclude more than that Canada is less wage-led than the whole Eurozone and less profit-led than Austria.

To me, even this ambiguity has an important policy implication. In large, relatively-closed economies (the Eurozone and United States), it would probably be sufficient to raise wages and redistribute income, allowing higher aggregate demand to then boost business investment.

These same pro-labour policies would be desirable in Canada, but given import leakages, the additional domestic demand may well be insufficient to spur investment. Therefore, Canadian progressives also need more direct policies to spur investment, such as public capital spending (whether on infrastructure or through Crown corporations) and targeted incentives for private capital spending.

Enjoy and share:


Comment from Paul Tulloch
Time: May 22, 2011, 11:39 am

I am not so sure about the closed economy characterization nor the size issue.

We have a lot of foreign ownership, we export a lot of resources, and most value added is in intermediate goods bound for a production process somewhere else, or assembly of final product here based on foreign intermediaries.

The numbers are deceivingly biased due to where we are in the value chain of most global production chains. Same goes for service industries, we are integrated with the global economy a whole lot more than just what the numbers portray.

Comment from Jim Stanford
Time: May 26, 2011, 10:15 pm

Thanks for these fascinating posts, Erin. There is an extensive literature in the “structuralist” tradition in economics which considers this wage-led versus profit-led dichotmoy in considerable theoretical and empirical detail. Main writers include Amit Bhaduri, Lance Taylor, Gerry Epstein, Stephen Marglin, Robert Boyer. The general finding, from my reading, is that most advanced capitalist countries (and the U.S. in particular) are not wage led — in the sense that increasing wages, in and of itself, does not stimulate more economic growth.

This seems to refute the simple-minded populism of what has often been called “paycheque economics.” Unionists and other progressives often argue that higher wages are good because they stimulate more consumer spending, and of course this is true — but it is not the whole story.

Even in a more complete and subtle analysis, however, we don’t need to abandon the idea that higher wages are good. We simply have to be realistic about the need to combine high-wage policies with OTHER policies aimed at further expanding demand and hence output — including measures to increase private and public investment, and/or measures to increase public sector activity.

I do not believe that Canada’s economy is generally wage-led, in the sense that increasing wages ALONE (via collective bargaining, higher minimum wages, or other mechanisms) would by itself stimulate more growth and employment. [In the context of a deep and chronic depression, wage-led mechanisms might indeed prove to be dominant. But that’s not the usual state of affairs.] I do believe, however, that higher wages are an important goal, and are achieveable without damaging output and employment if they are appropriately combined with other output-expanding policies.

Comment from Paul Tulloch
Time: May 27, 2011, 9:36 am

just a point on size of the economy.

sure we have a large GDP per capita, but potentially in a more relevant way to measure an economy, I am more inclined to go with number of bellies to fill. So size of an economy must be more inclusive.

An economy must be based on social responsibility and therefore my belief that Canada in such terms is a smaller economy.

Comment from Travis Fast
Time: May 27, 2011, 7:02 pm

Jim you are right. I often make the slip of equating wage growth with demand growth and while they are connected they are conceptually different. The question also needs to be posed in terms of the cycle. I suspect the US would get a big bang from wage increases right now if they occurred in particular sectors.

On productivity I also think you are right: Ford could pay what he did because his productivity was what it was. And the innovations at the Ford plant forced others who were either in the industry or wanted to get in to adopt similar technologies. Which in the end helped Ford stabilize its turnover problems because his work conditions became the norm.

Comment from duncan cameron
Time: May 29, 2011, 10:35 am

We have had economic growth in the last thirty years without real wage growth, so it could not be leading the way. Conversely, I do think wage reductions have a negative impact on growth. The distribution of wage gains seems all important to me, thus the importance of unionization. The growth in income inequality has had a big impact on what kind of services economy has developed. From Walras to WallMart I once heard Mike McCracken say.
Throughout Canadian economic history commodity prices have been the leading indicator of growth. How much has that changed? Not that much, sadly. Without any kind of economic planning for advanced industry and services, we are unlikely to get balanced growth in employment and wages. Public investment skewed towards F35 fighters and naval warships harbours poorly for the future. Think what could be done with that money.

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