Bank of Canada Governor Stephen Poloz, battling to bring inflation up to his target, isn’t getting much help from wages.
Average hourly earnings of permanent employees, the central bank’s preferred measure, have gained an average 2.1 percent over the last year, slower than the 2.9 percent average seen over the past decade. At the same time, Canada’s labor participation rate has fallen to the lowest since 2001, indicating a pool of employees who can rejoin the workforce if demand increases, keeping a lid on pay increases.
“Wages haven’t been a worry and won’t be a worry anytime soon,” said Craig Wright, chief economist at Royal Bank of Canada in Toronto. “It suggests inflation isn’t going to be a problem, so no panic on the interest-rate side.’
Inflation has held below the Bank of Canada’s 2 percent target for 22 straight months, registering 1.1 percent on a annualized basis in February. The bank has kept its benchmark interest rate at 1 percent since September 2010, and with policy makers saying price increases won’t return to target until the end of 2015, economists predict the Bank of Canada won’t raise its benchmark rate until at least the second quarter of next year.
Rising wages can lead to increased inflation if workers spend the extra income they receive, thus boosting demand for -- and the prices of -- goods and services. That scenario seems unlikely for Canada, said Doug Porter, chief economist at BMO Capital Markets in Toronto.
‘‘I wouldn’t look for any serious uptick in wage inflation anytime soon,” Porter said by telephone. “Consumers are going to be hard pressed to make much of a contribution to growth.”
Poloz has said he is equally concerned about inflation falling below target as rising above it. Major central banks have set loose monetary policy since the 2008 financial crisis to avoid a prolonged period of falling prices known as deflation, which can make it harder to repay debts and encourage people to delay purchases as they wait for ever-bigger discounts.
Households carrying near-record debts as a share of income may struggle to continue to drive growth, and the Bank of Canada said in its last monetary policy report it doesn’t see any signs yet of a rotation of demand toward exports and business spending.
Other wage measures suggest modest increases. Private-sector wage settlements from collective agreements rose 1.9 percent in the third quarter. Unit labor cost growth slowed to 1.3 percent last year from 3 percent in 2012, Statistics Canada said March 7. The statistics agency said today that while average weekly wages of non-farm payroll employees were 3.0 percent higher in January than a year earlier, they were “virtually unchanged” from December.
Companies have been curbing their hiring, adding just 5,280 full-time jobs in 2013, according to Statistics Canada. Conifex Timber Inc. is tying wage gains to worker efficiency as it seeks to boost profit margins. “We expect mid-single-digit gains in lumber segment productivity sufficient to enable us to absorb higher wage rates,” Chief Executive Officer Ken Shields said on a Feb. 24 earnings call.
“One of my concerns is if the Bank of Canada succeeds in restoring 2 percent inflation without an increase in wages, that would cause Canadian workers to fall behind,” said Erin Weir, an economist at the United Steelworkers in Toronto. Governments should focus on measures that would give workers more collective bargaining powers and other ways to boost wages as the economy grows, he said in a phone interview.
The debate has reached the national legislature, with lawmakers arguing this week about what meager wage increases say about Canada’s labor market. There has been a “stagnation” in wages since the last recession in 2008-09, illustrating “continued slack in the labor market,” the Parliamentary Budget Officer wrote in a March 25 report.
Employment Minister Jason Kenney told lawmakers that industry organizations show “very acute skills shortages in particular regions and sectors.” At the same time, “we do not have a general labor shortage in Canada,” he said. “If we did, it would be reflected in higher wages, salaries and benefits, which is not the evidence.”