Thursday, November 24, 2011

Deceleration in earnings growth

Over the past 18 months, Canadian inflation has been rather higher than in the U.S., although both Canada (1%) and the U.S. (0.25%) have each very low director rates have been substantially below headline inflation -- around 3% for Canada and 2% for the U.S.

Of course, and I have said this on a number of occasions, Canada's economy is fundamentally different to that of the U.S.  Services are a much larger percentage of US economic activity than in Canada, but still both economies are dominated by services.  The most important component of cost growth in a service economy is wages -- and whereas America has a huge (but slowly resorbing) unemployment problem (U3 at 9% and U6 at 16%), Canada has a much lower level of unemployment (on a like for like basis about 6% -- high still at this stage of the recovery but hedging closer to the BoC's "full employment" target range of 3%).

As an economy moves closer to full employment labor market tightness causes wages to rise, and this has been the case in Canada -- as demonstrated by the rising national income.  This rise has been dramatic over the past few years, substantially higher than inflation.  Now however (and the data is as of September 2011) the rate of growth in earnings is tampering as can be seen below:

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

of course, after the 2008/09 recession it was only normal that some correction would occur, but now it appears that wage growth are slowing dramatically, a reflection of our export market -- not only have wages tempered but so have the number of hours worked.  What is remarkable, is that Canada is now in a position where wages have tempered while hours worked have not decline that much.  A strange situation.

On a geographical basis the changes in wages is also very interesting -- while wages in Western Canada continue to rise dramatically, they are stagnant in Quebec and have dropped by 2% in Ontario -- these two province account for almost 3/4 of Canada's entire population -- so Saskatchewan's 8% YoY wage growth (population 1 million) is insignificant.

BTW that may explain why the Ontario government is in "freak out" mode this morning -- stagnant or falling wages impact tax revenues -- and Ontario's got a problem there!

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