Retail Prices: The US vs Canada
I saw quite a lot of media coverage of a BMO report that Canadian retail prices are 20% higher than in the US despite exchange rate parity. There were allegations of price  gouging and references to the allegedly much more intensely competitive US retail environment.
I hesitate somewhat to say so in case the argument is misused, but there are good and defensible reasons why the retail cost structure is higher in Canada.
I recently posted a plug for a Caledon study showing that the average minimum wage in Canada has increased fairly significantly in recent years to $9.31 per hour, and now stands just 92 cents per hour below its mid 1970s peak. (Note that the numbers in their study have been corrected since my original post.)
By contrast, this EPI note shows that the US federal minimum wage – covering all workers engaged in interstate commerce – is well below its peak and stood at just $6.54 per hour in 2009. A few States have somewhat higher minimum wages. They are $7.25 per hour in New York State which is very much on the high side compared to $10.25 per hour in Ontario.
Given that retail wages are often set at or somewhat above the minimum wage, and given that our dollar is now significantly above parity, there is likely a big gap in retail labour costs. Wal Mart may well be paying 50% more in Ottawa than in Northern New York State where many of my neighbours go in search of “bargains.”
I think higher minimum wages are a good thing. Certainly they are a good thing for lower-paid Canadian workers. And they generally do not have much of a competitive impact in traded sectors as opposed to domestic services.
But, in fairness, let us limit the populist impulse to scream about price gouging Canadian retailers just because we pay a bit more at the cash than our US neighbours.
I am not one to criticize a high minimum wage, on the contrary.
I support a truly progressive income tax AND taxing corporations for the benefit their receive, as do the wealthy as well as the not wealthy, from our country.
Our country not simply as some kind of traffic cop, but is the insurer of necessary services for all. These are my values, beliefs, norms.
But from the last time the Canadian dollar was at a premium to the American dollar, I remember the reasoning given for the difference between book prices in these two countries by Chapters. Books have been specifically mentioned in the press coverage of this issue.
The price difference is difficult to ignore in that both American and Canadian prices are printed side by side on most books.
I leave the precise mathematical analysis of the difference between the business Walmart runs in Ottawa and the business Chapters runs in Ottawa to the technicians, and possibly the theologians, but Chapters has itself described the mechanics of book pricing.
The bulk of the books sold in Chapters come from foreign publishers, particularly American. It declared prices are determined not by it, but by the publishers, and usually several months before the books appear on its shelves. They say that Americans charge for the greater distribution costs in a smaller market.
While there are a variety of discounts, especially in its online business, in direct competition with Amazon, Chapters has said there is little it can do about the price itself.
It, and its minimum wage employees, endured much pressure the last time.
Chapters will not accept American money to pay for the American price, only the Canadian price, because that is what it pays. Any currency arbitrage profits made, it says, are made by the Canadian subsidiary of the American publisher or distributor.
Now, one can either accept Chapters, and its CEO, at their word, or not. But I have noticed in the several years since the last time the Canadian dollar was at a premium to the American, that the average price of books seems to have moved from somewhere in the $40 range to somewhere in the $30. There are even some books with a single North American price.
There remain the bargain books, which are sold in the stores and are significantly discounted–often, hardcover versions are less expensive than softcover (it continues to be the highest profit source for the company).
It is unclear what overall benefit the slow raising of the minimum wage has had on the students and others who work, rarely closing in on a living wage. Prices around them have risen at the same time: $10 dollars an hour when the current phase-in of this minimum wage might have been significant; it isn’t today. And there remain just as many employees struggling for the same number of shifts as before.
Still inadequate.
But as I remember, the commitment of the Ontario Liberals to the now-finished increase in the minimum wage was in response to political pressure. It was the NDP, I believe.
How rare it is political economy works for those less privileged in our society–i.e., those who make much less. Even when they have mathematical science on their side.
The EPI also concludes that minimum wages have very little effect on consumer prices.
I think a big part of the story is that retailers set prices based on what the local market will bear. They do not automatically pass through their savings from a high Canadian dollar, nor did they fully pass through their costs from a low Canadian dollar a decade ago.
“Canadian” retailers (ie. those subsidiaries of US chains) will charge what they can.
As long as our government allows this kind of gouging, it will continue.
Since 2002, the Canadian dollar has appreciated roughly 65%, from $0.66US to $1.03US. Other things being equal, Canadians should have seen a 65% drop in prices for goods and services imported from the US, our largest supplier.
They have not. And it’s not because retail costs have consistently jumped every year to subdue the benefits we should enjoy from a rising dollar. This is a failed argument that right-wingers use to keep pressure on wages and benefits in this country and elsewhere.
Over the next two weeks, the first party the promises pricing reform or investigation into why Canadians are getting screwed will be elected.
I checked the numbers and the average hourly retail wage for hourly paid workers in Canada is $14.90 – or at least $15.35 in US dollars. In the US, the average hourly wage for non supervisory retail workers is $13.37 per hour. So the hourly wage cost gap is about 15% or $2 per hour which has to have some impact on relative prices in a relatively labour intensive industry even if modest increases in the minimum wage only have modest impacts on retail prices.
Canadian retailers do import a lot of goods from the US and, especially, Asia priced in US dollars and benefit from a higher exchange rate. But a lot of their costs (wages, rent, power, property taxes, distribution costs in a smaller market etc.) are still incurred in Canadian dollars and do not fall with the exchange rate. Indeed they rise when expressed in US dollars. So … I think it is simplistic to expect retail prices to converge quickly to US levels.
Andrew, I wonder if it might be usefule to track the route taken by our imports from Asia. If, for instance, the Korean-made TV in a Canadian store has been imported through the US, rather than at a Canadian port of entry, then we still suffer from the downgrade in the value of the US dollar; and then our prices are jacked up to recoup the American importer’s loss.
Even if it comes through Vancouver, that TV may still cost more if the importing company is controlled or owned by a US parent?
If wages accounted for half of retail costs, 15% higher wages would imply 7.5% higher costs. Of course, differences in minimum wages explain only a portion of differences in average retail wages. So, minimum wages cannot explain much of a 20% difference in retail prices. I agree that many other explanatory factors are at play.
“I checked the numbers and the average hourly retail wage for hourly paid workers in Canada is $14.90 – or at least $15.35 in US dollars.”
This is quite an interesting figure, Andrew.
It is an unusual Chapters non-supervisory employee who makes anything close to $11 an hour. Do the Canadian figures break out for supervisory and non-supervisory like the American figures?
I don’t have the exact number of Chapters non-supervisory employees in front of me, though I suspect it is far from trivial.
But there must be a significant number of non-supervisory retail employees in Canada who make substantial money for the AVERAGE, not the median, to make almost $15 dollars an hour.
I am certain the part time employees at Chapters, unable to get significant hours–full time are such a rarity–would be happy to know that economics says they are doing so well.
Maybe they are a reserve army of the part time.
If you look at the highly competitive online computer retailers Canadian prices are actually lower than US prices. Just google Newegg, they have both American and Canadian sites. The Canadian prices are lower.
What Newegg does demonstrate is that when you take wages out (online retailers with no physical stores and low staffing costs) and combine that with a competitive market, Canadian prices are lower as they should be.
Now it could be that profit rates are lower too in this retail segment so it is hard to say whether it is competition (lack) or wages driving higher general Canadian retail prices.
My instinct is that the market structure in different retail segments determines whether or not retailers can pass on the higher labour costs or have to eat them. We would need profit data by retail segment to see what is actually going on.
Stephen Gordon raised the issue of prices today in the Globe, specifically the price of gasoline and why it is good for Canada. Okay, we know Tom Flanaghan is on the oil company tab, I am starting to think maybe Stephen is now receiving cheques from the same source.
“To be sure, there are some people for whom this shift is genuinely bad news: many with low incomes may not be able to easily reduce their consumption of gasoline. But the real problem facing these households is that they have low incomes. As my Economy Lab colleague Kevin Milligan puts it, intervening to reduce gasoline prices is a price solution for an income problem (see also here). The proper remedy is to provide increased income support for those who need it. ”
Okay Gordon, again you are bypassing the issue and somehow window dressing the rise in prices. You take an oligopoly inefficiency and dress it up as a net benefit and then say where there is a problem, blame the victim? You must be getting oil money- seriously you have to be, to write such non-sense.
We just reduced corp taxes, big oil is still receiving over 2 billion in annual subsidies, and they are raping consumers- and the best you got is how this is a great thing for consumers?
I thought you were a numbers guy, I thought you believed in game theory and such, surely using those tools you can see that the net effect is a lose.
You fail to mention the price gouging, or the speculative efforts, or solutions to the inelastictity and the ‘income problem’, or where we get the cash to pay for these income problems. (and by the way, those income problems you mention effect at least 1/3 of Canadians).
So how about this- we create a special royalty tax right now, this very instant (like the UK was considering- to help the 1/3 suffering and requiring social transfers to offset these new costs)
You cannot just separate the two issues and not factor the income issue into the overall effect. If you did, there is a negative effect, unless of course you are being paid by the oil companies, or live west of Manitoba.