Wage Deflation Confirmed

In an earlier post, I noted that falling real wages as indicated by July and August data from the Labour Force Survey which showed increases of just 1.4% in nominal hourly wages over the past year  signalled trouble ahead: “If this trend continues, it is likely to further undermine a weak recovery, negatively impacting upon consumer spending and perhaps serving as  the tipping point to deflation of the housing bubble.”

Today’s Statscan release of SEPH data confirms that real wages are falling. In July, Average Weekly Earnings were up just 2.2% from a year earlier, compared to an inflation rate of  2.7% . While this fall in weekly earnings was partly due to a small fall in weekly hours and also reflects the changing mix of jobs by industry, fixed weight average hourly earnings in July (a stat that controls for the changing mix of jobs) were up by just 1.3% over the past year.

As shown in the following Chart taken from the release, the rate of increase of average weekly wages has been falling more or less consistently over the past year.

The Bank of Canada should – and probably will – be concerned about wages increasing at less than the target rate of inflation plus productivity growth, since this could lead to inflation below the target level.

In any case, real wage deflation is definitely not a good thing for working families, and will result in lower household spending and rising unemployment.

Year-to-year change in average weekly hours and average weekly earnings

Year-to-year change in average weekly hours and average weekly earnings

One comment

  • Hm. Average, huh?
    If I posit a scenario where upper executive wages continue to increase rapidly, that would suggest that median wages, or other measures of wages earned by normal people, must be declining even faster.

    Meanwhile, what kind of inflation are we talking about here? “Core” inflation, AKA inflation that measures everything that isn’t core? I bet if you include food, fuel and shelter, inflation in terms of actual cost of living is growing faster than that. Which would mean that wage deflation relative to genuine costs is even greater. In the US as I understand it (according to outfits like Shadowstats) there are additional oddities in measurement which result in systematic understatement of inflation; I don’t know if we use the same monkeywrenched approaches. If so, we’re underestimating genuine inflation even if we use a non “core” measure that includes things like food.

    All in all, this is IMO probably a low-end measure of a phenomenon that is happening faster than this indicates and has probably in reality been happening for some time before it showed up in these numbers. So I agree with you, but suspect that it’s actually more so.

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