Wages Lag Inflation

Wages had seemed to be one of the relative bright spots during the economic crisis. Despite the carnage in Canada’s job market, average hourly earnings held up fairly well.

However, comparing today’s Consumer Price Index release for January with the Labour Force Survey for that month reveals that inflation exceeded fractional wage gains over the past year. Specifically, the annual inflation rate was 1.9%, while average hourly wages rose by only 1.8%. In other words, employers are paying less in real terms.

Of course, there were important regional variations. The loss of purchasing power was concentrated in Alberta, Quebec and the Atlantic provinces (other than Nova Scotia).

Wages and Inflation by Province, January 2009 to January 2010

 

 Wages

Inflation

Real Wages

 Canada

 1.8 %

 1.9 %

(0.1 %)

 NL  

 2.4 %

 3.2 %

(0.8 %) 

 PEI  

 1.2 %

 4.0 % 

(2.8 %) 

 NS 

 5.1 % 

 3.1 % 

 2.0 % 

 NB  

 3.6 % 

 3.9 % 

(0.3 %) 

 QC 

 1.1 % 

 2.2 % 

(1.1 %) 

 ON

 2.0 %

 1.9 %

 0.1 % 

 MB 

 2.2 % 

 1.7 %

 0.5 % 

 SK  

 4.8 % 

 1.6 % 

 3.2 % 

 AB  

 1.1 % 

 1.7 % 

(0.6 %) 

 BC  

 1.8 % 

 0.7 %

 1.1 %  

 

These figures do not indicate excessive inflation. In fact, inflation remains below the Bank of Canada’s 2% target. The central bank still has room to keep interest rates near zero. It should even contemplate further monetary expansion to moderate the exchange rate, which has recently jumped back up to around 96 American cents, threatening Canada’s export industries.

The problem is that nominal wage increases have been puny. High unemployment and insecurity are giving employers more bargaining power just as many contracts set before the economic crisis are expiring. Governments can and should help to redress the balance with stronger employment standards legislation, including higher minimum wages, and by reforming labour legislation to make it easier for workers to join unions.

UPDATE (February 19): Quoted by CanWest

UPDATE (March 11): Quoted by Canadian Press

4 comments

  • What happened to deflation, despite our dollar strength, we’ve had small inflation increases but because it has not been worse because of a strong dollar despite using every tool but selling canadian dollars to drive the currency down, should further ease. Exports should be statistically equal to imports to create an equal balance of trade, and suggesting export should come fist is equal to the mercantile belief in mass produced exports. Mass produced anything doesn’t guarantee happiness or success. I do not see, how simply creating a favorable exchange rate will solve our problems. “Americans are spent out, unemployed and can’t use their homes as ATMs,” said David Gilmore, at Foreign Exchange Analytics in Essex, Conn. “We need foreigners to pick up the slack, but a strong [US] dollar certainly won’t help that.

  • I don’t think there is much room for monetary expansion with the overnight interest rate at 0.25%, 1 month treasuries at 0.14%, and 1 year treasuries at 0.56%. However there is still lots of room for the federal government to spend on worthwhile projects such as high speed intercity trains, public transit, basic pharmaceuticals for all (tightly cost-controlled), etc, etc. This would provide useful goods and services, get more Canadians working and probably drive down the dollar as monetarist currency portfolio managers get upset.

    In line with your post re wages, the Feds definitely shouldn’t be reducing public service salaries and pensions thereby squeezing aggregate demand when it needs support as evidenced by high unemployment and underemployment.

  • I don’t think there is much room for monetary expansion with the overnight interest rate at 0.25%

    What about quantitative easing?

  • Hi Erin,
    Interest rates for credit-worthy borrowers are low now so there is not much point to either quantitative easing or credit easing now.
    Quantitative easing, that is the purchase of private sector financial assets by the central bank in exchange for excess reserves (excess settlement balances in Canada), would not be of any significant help in Canada now. If the central bank purchases long term debt then long term interest rates drop slightly. Today long term interest rates for private sector credit-worthy borrowers is low so there wouldn’t be much point. Earlier in the financial crisis interest rates on loans to private borrowers were higher so it might arguably have had some minor effect. In fact it could be said that some quantitative easing did occur in Canada as excess settlement balances in the banking system have climbed from $25 million before the crisis to $3 billion today. However since banks don’t loan out these balances this doesn’t actually change anything in terms of the ease of getting a loan.
    Credit easing, the purchase of private sector financial assets in exchange for government bonds (rather than excess reserve balances) has occurred in Canada. Early in 2009 a complicated asset swap between the chartered banks, the Bank of Canada, the department of finance and the CMHC led to an exchange of about $100 billion of bank-held mortgages being taken over by the CMHC in exchange for government of Canada bonds.
    There really is just fiscal policy left – either lowering taxes or increasing federal government spending. Given all that needs to be done by government in our country I would choose the increase in spending.
    By the way Arun Dubois had a post about a year ago on quantitative easing.

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