Missing wages, union power and Poloz’s dilemma

AUTO INDUSTRY

It’s too soon to conclude bargaining power is back, given the limited sample size, but at least the worst may be over after a brutal couple of years for organized labour when negotiated wage increases were at their lowest since the 1990s.

Wages, or the lack of pay increases more specifically, have become a top economic issue in Canada. By about every measure, Canadian wages went into a major slump in the aftermath of the oil price plunge that started in 2014.

Based on wage settlement data, negotiated annual wage gains were below two per cent for 28 straight months through January, the longest stretch since the mid 1990s. A Statistics Canada survey of business payrolls showed gains in hourly earnings were consistently below one per cent in 2016, before beginning to recover at the end of the year. A separate Statistics Canada survey of households — the one that generates most of the headline labour data such as the unemployment rate — shows wage gains at the lowest since at least the 1990s and only getting worse. Not to mention, pay hikes are no longer keeping pace with the cost of living.

A lot of this isn’t really a surprise given the whole economy had been suffering over the past two years — including a contraction in output in 2015. Nor is the problem just in Canada. Many developed countries are struggling with sluggish wage gains, reflecting a number of factors that include falling productivity levels.

Dias’s theory is the massive job losses in manufacturing, coupled with the recession, have scared workers into making wage sacrifices in exchange for job security.

“Since the recession, people have been on their heels,” he said.

The issue, though, is gaining prominence as Canada’s economy shows signs of finally emerging from the commodity slump, including a sharp rebound in employment. That there’s no decisive evidence pay increases are also rebounding is a bit of a head-scratcher.

Some bits of data, like wage settlements, show reason for optimism. Others are ambiguous or even point to weakness.

Why does this matter? The big question for policy-makers, particularly at the Bank of Canada, is how much credence to give to the recent upswing. Since borrowing costs are still at historical lows, an economy that’s about to return to normal would surely warrant a tightening of accommodation.

What happens for example if strong wage gains are just around the corner, and the central bank fails to act? The result could be a sudden sharp increase in wage cost pressures, and a bank racing to catch up with even sharper and more destabilizing rate hikes down the road.

Rising wages and sudden interest rate hikes would have far-reaching impacts in other areas of policy, one of which would be Prime Minister Justin Trudeau’s ability to move ahead with his infrastructure spending plans.

That’s why the Federal Reserve — faced with U.S. employment gains not much faster than Canada’s — has already begun raising rates gradually.

Some analysts are brushing off the recent weakness, saying wage data will fall into place as the economy strengthens. They conclude the Bank of Canada will be forced to raise rates more quickly, like the Fed.

The Bank of Canada, which has shown reluctance to follow the Fed higher, will provide its latest thinking on the matter Wednesday when it releases its rate decision and monetary policy report.

Up to now however, the central bank has highlighted “subdued” wage growth as evidence of continued slack in the country’s labour market even amid all the other good economic data. That’s left investors pricing in a less than one-third chance of a rate increase this year.

And if one is predisposed to worry about the negatives more than the positives, there’s still plenty to worry about in the wages data.

For one, it’s impossible to imagine a recovery the central bank would be comfortable with that doesn’t include a sustained pick up in goods production, exports and capital investment — and the one thing the household survey wage data show, if nothing else, is that the goods producing sector remains a big question mark.

Wages in manufacturing have been stagnant or falling for months, while earnings in construction (amid a slump in non-residential investment) are dropping sharply. The biggest drops in construction and manufacturing wages have been in Ontario, Canada’s largest province and main growth driver.

Another possible explanation for slumping wages is the lowest paid segments of the labour market are generating most of the new jobs, according to Bloomberg calculations. Hardly confidence inducing.

There may be enough here to keep the Bank of Canada dovish this week. It’s not just workers, like Unifor’s Dias points out, who have become overly cautious since recession, back on their heels. So have central bankers.

Or, in the words of Bank of Canada Governor Stephen Poloz at a recent press conference: “Upside risks would be great, downside risks would be a problem.”