The Wage-Price Squeeze

In August 2008, ordinary Canadians were squeezed by rising annual inflation and slowing annual wage growth.

The decline in consumer prices from July to August 2008 (-0.2%) was smaller than the normal seasonal decline in prices between these months. (On a seasonally-adjusted basis, Statistics Canada estimates that consumer prices rose 0.2%.)

Compared to last month, the annual inflation rate edged up by 0.1% to 3.5%.  At the same time, the annual growth in average hourly wages slowed by 0.2% to 3.8%.  In real terms, Canadian workers were being paid only 0.3% more in August 2008 than in August 2007.

Of course, this national figure masks important regional variations.  Inflation significantly overtook wage growth in two provinces.  In Ontario, real wages decreased by 0.7%, eclipsing the 0.1% decrease recorded last month.  Real wages also fell by 0.9% in Nova Scotia.

In British Columbia, real wages stagnated with wage growth barely exceeding inflation.

The only large improvements in real wages occurred in Newfoundland and Labrador (4.4%), Prince Edward Island (4.6%) and Saskatchewan (4.0%), which have relatively little effect on the national average.

Rising energy prices accounted for half of the annual increase in consumer prices. With the core inflation rate at only 1.7%, well below the Bank of Canada’s 2% target, there is ample room to cut interest rates.

By expanding the US money supply, the bailout of the American financial system may place downward pressure on the US dollar. Indeed, the Canadian dollar shot up 1.5 cents relative to the American dollar yesterday. To moderate the exchange rate and keep Canadian exports viable, the Bank of Canada should cut interest rates.

UPDATE (Sept. 24): Electronic coverage by CanWest and Reuters

Wages, Inflation, and Real Wages by Province, August 2007 – August 2008

(Labour Force Survey and Consumer Price Index)

Canada:  3.8% – 3.5% = 0.3%

NL: 8.6% – 4.2% = 4.4%

PEI: 9.4% – 4.8% = 4.6%

NS: 3.5% – 4.4% = (0.9%)

NB: 4.8% – 2.6% = 2.2%

QC: 3.8% – 3.1% = 0.7%

ON: 2.8% – 3.5% = (0.7%)

MB: 4.6% – 3.4% = 1.2%

SK: 7.4% – 3.4% = 4.0%

AB: 5.3% – 4% = 1.3%

BC: 3.4% – 3.3% = 0.1%

2 comments

  • I have a question. We have seen many studies showing that real wages are, on average, growing faster than inflation. Also, the big consulting firms annually show corporate wage increases exceeding inflation by about 1% a year. Yet we also know that on average waged workers haven’t seen a real increase since 1980.

    This means the money must be going somewhere, but we know for sure that the poor and low-wage workers aren’t getting it. Can we safely assume that the additional money is gravitating towards a growing professional, management, and executive class, who are salaried and not reflected in the wages data? If the number of university graduates is growing long-term, and they’re filling a larger fraction of the population in that higher income “professionals” bracket (for example increasing from 8% to 10% to 12% of the workforce), then they could end up making about as much as their predecessors but still suck up a substantial share of GNP growth. That would explain all the contradictions in the data.

  • Yes, Stuart, a number of recent Statistics Canada studies show that the wage increases are largely concentrated in the higher-paying jobs and particularly in management. See, for example, René Morissette’s “Earnings in the last decade” or Jane Lin’s “Trends in employment and wages, 2002 to 2007” both published this year.

    The salaried occupations are included in the estimates of hourly wages (they ask people to estimate the number of hours they work and then work out the hourly wages). It is these higher management/professional wages that explain the rise of the average real wage at a time when the low-wage tiers of the labour market are not seeing much improvement.

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