Behind the Numbers

Canada’s Economic Problem is NOT High Wages

August 16th, 2012 Andrew Jackson · 2 Comments · Economy & Economic Indicators, Employment and Labour, Employment Insurance, Federal Budget

Bill Curry reports in today’s Globe that, at last year’s economic policy retreat, business leaders urged Finance Minister Flaherty to reduce the pay of “overpriced” Canadian workers, including through anti union right to work legislation.

Coincidentally, or not, the subsequent 2012 federal Budget introduced new rules which will require most EI claimants to accept jobs at much lower wages, and will allow employers of temporary foreign workers to pay less than the prevailing Canadian wage.

So, are Canadian wages really “too high.”?

The reality is that the pay of most workers has stagnated in real terms over the past thirty years as the profit share of  GDP has increased at the expense of wages, and as wages have become much more unequal with more and more of the total wage and salary bill going to the top 1% made up mainly of senior executives. As the OECD recently reported, since 1990, 6% of total national income has been shifted from wages to profits and the pay of the top 1% combined.

And a recent Statistics Canada study documents the stagnation of real hourly wages of the majority of Canadian workers between 1981 and 2011. Over that entire thirty year period, the average hourly wage of full-time workers rose by just 14% (and that includes the top 1%.) . This compares to growth of over 50% in real GDP per person over the same period.

The view that wages are “too high” boils down to saying that workers have no right to share in rising national income, all of which should go to profits and senior managers. That is, to say the least, a curious basis on which to sell the proposition that workers have any kind of stake in our current economic arrangements.

Even within the very narrow logic of international economic competitiveness, it is hard to argue that wages put Canadian employers at a significant competitive disadvantage.

The US Bureau of Labour Statistics publish harmonized data on unit labour costs in manufacturing. These will go up if increases in nominal hourly wages outstrip productivity gains, and are widely used as a measure of competitiveness. The base year is 2002.

Between 2002 and 2010, Canadian unit labour costs rose by 67.6% in US dollar terms, while US unit labour costs fell by 10.8%.  That is a huge loss of competitiveness compared to the US and countries, like China, which more or less peg to the US dollar.) This readily explains why we lost over 500,000 manufacturing jobs over that period.

However, measured in Canadian dollar terms, Canadian unit labour costs rose by only 9.9%, 2002 to 2010. The appreciation of the Canadian dollar against the US dollar has obviously been the key factor behind loss of competitiveness and jobs. (Minister Flaherty seemed singularly untroubled by this heading up to his retreat.)

Lagging productivity has also been a significant factor. Between 2002 and 2010, output per hour in US manufacturing rose by 47.1% compared to a meagre 10.0% in Canada. Minister Flaherty should be asking the CEOs at his retreat why they are sitting on record amounts of retained profits rather than investing in productivity enhancing machinery and equipment, research and development and worker skills.

And what about hourly wages in manufacturing in Canada? According to the BLS, they rose by just 20.9%, below the increase of 31.2% in the US.  Bear in mind that these are nominal wage increases. The BLS calculate that annual earnings in manufacturing adjusted for inflation rose by just 1.5% in Canada, 2002-10, compared to 10.2% in the US.

So, Canada’s massive loss of competitiveness against the US and countries that peg to the US dollar is overwhelmingly explained by the change in the exchange rate and our appalling productivity record, not by wages.

Not that this will stop the CEOs at this year’s retreat from complaining about over-paid Canadian workers.

(Full disclosure. I was invited to and attended the retreat in 2009. This should ensure that I am not asked back.)

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2 Comments so far older updates

  • Crusher

    The problem is Corporations having to continually increase their profit every quarter. eg. What happens if you’ve saturated your market and can’t in crease sales. CEO will not get his bonus unless shares show increase. CEO’s should get a wage only. If a CEO needs a bonus to be motivated, theirs something wrong with that CEO, and he should be let go. Its been shown over and over again accountants can fudge numbers.

  • Stephanie

    In the context you’ve just mentioned here I realize how important the recovery of the U.S. economy is for our country. I have been following the U.S. presidential campaign from Canada and I have to say the Romney/Ryan ticket seems to be a better choice not only for the U.S. but for Canada as well. Most Canadians were disappointed when President Obama didn’t approve the Keystone pipeline project and thus destroyed a promising prospect on the way to the economic recovery in both countries. More importantly, the interconnection between Canada and the U.S. is benefical not only for our national economy as a whole but also for the economic development in Canada’s regions which could best be seen when the recovery in the U.S. motor vehicle market positively influenced Toronto’s leading automotive industry. However, I’m afraid that Obama’s decisions could threaten such positive economic development and worsen the relationship between Canada and the U.S.

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