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ANALYSIS

A puzzling trend can be found in Canada's labour report: despite a hiring boom that's helped drive the jobless rate to its lowest level since 2008, wage growth is decidedly sluggish.

In theory, wage growth should strengthen as employers compete for a dwindling supply of desirable workers. Instead, one closely watched metric is plumbing some of its lowest levels on record, in Statistics Canada data going back about two decades.


Canada's mediocre numbers are hardly unique. Across much of the industrialized world, wage growth is tepid, raising concerns about widespread structural forces weighing on compensation.

But the outlook is not entirely bleak. There is reason to believe that Canada is poised for solid pay gains, and that depending where you look, the situation is not as dire as it would appear.

For one, despite a relatively low unemployment rate of 6.3 per cent in July, there's still excess slack in the labour market.

"Even though we've seen the best job growth in 10 years, it's likely that we still have a significant segment of the population that's working part-time, but would like to be working full-time, that are not in the jobs they hope to be working in now, or put differently, that there's a skills mismatch," says Frances Donald, senior economist at Manulife Asset Management.

Canada has likely not hit "full employment," or the lowest level to which the unemployment rate can fall without causing inflationary problems. Douglas Porter, chief economist at BMO Nesbitt Burns, pegs full employment at close to 6 per cent, or even lower. He notes "the longer we stay at or close to full employment, the more likely we will ultimately get real wage pressures."

Fortunately, companies appear set to bolster staffing levels. In the Bank of Canada's most recent business outlook survey, hiring intentions climbed to a record level.

Hiring intentions: Balance of opinion

Over the next 12 months, is your firm’s level of

employment expected to be higher, lower or the

same as over the past 12 months?

60%

50

40

30

20

10

0

-10

2003

2007

2011

2015

Note: A positive reading indicates more businesses expect to

increase employment than decrease.

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Hiring intentions: Balance of opinion

Over the next 12 months, is your firm’s level of

employment expected to be higher, lower or the same as

over the past 12 months?

60%

50

40

30

20

10

0

-10

2003

2007

2011

2015

Note: A positive reading indicates more businesses expect to increase

employment than decrease.

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA

Hiring intentions: Balance of opinion

Over the next 12 months, is your firm’s level of employment expected to be higher, lower or the

same as over the past 12 months?

50

40

30

20

10

0

-10

2003

2007

2011

2015

Note: A positive reading indicates more businesses expect to increase employment than decrease.

THE GLOBE AND MAIL, SOURCE: BANK OF CANADA


"Positive hiring intentions are broad-based across all sectors and regions, even in energy-producing regions," the central bank said in its report.

After the oil-price crash, the loss of well-paid natural-resources jobs weighed on aggregate wage increases, many economists note.

In Alberta, employment associated with new oil-and-gas investment has plunged since the end of 2014.


More broadly, the share of the Alberta's workers in goods-producing industries has declined by four percentage points, to 25.2 per cent, over the past three years. (The average hourly wage rate in the province's goods sector was most recently $36.32, compared with $27.37 in services.)


To be sure, the displacement of high-paid work is a concern. But it doesn't mean individuals aren't receiving pay hikes.

"You could have zero wage growth for the economy as a whole, and yet every single worker within the economy is seeing year-over-year growth in their wages," says Trevor Tombe, an economics professor at the University of Calgary.

This would happen, he says, by jobs shifting out of higher-paying occupations into lower-paying ones. "And we've seen that with low oil prices," Mr. Tombe adds.

Which labour data you look at can also make a difference.

Much of the monthly attention is given to the Labour Force Survey, largely because it's the timeliest reading of what's happening in the job market. (The first chart above is based on LFS data.) Another key report, the payroll survey of employers, is often overlooked, but contains some more encouraging wage figures.


"I suspect it's actually a bit more indicative of the true underlying trend," BMO's Mr. Porter says of hourly earnings data in the payroll report.

There's another factor that will support wage growth in the future: mandated increases. Alberta is phasing in minimum wage hikes that will eventually bring the province's hourly minimum to $15. The Ontario government has proposed boosting its minimum wage to $15 an hour.

Moreover, Canada is riding a torrid economic streak, leading the Group of Seven nations in inflation-adjusted growth.

But as the labour market continues to tighten, companies may find it more challenging to lure workers without sweetening their offer sheets.

"Eventually, the need for skilled workers will become so great that there will start to be more competition between employers, and they'll have little choice but to push up wages in certain trades, in certain sectors," Mr. Porter says.

On Friday, the next Labour Force Survey is released, with employment figures for August. Once again, it may show a low jobless rate, but underwhelming wage gains. If so, keep in mind this insight from Mr. Porter: "Wage pressures are not like a light switch that suddenly get turned on the second we hit full employment."