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Canada's economic problem is not high wages

Photo: Carissa Rogers/Flickr

Bill Curry reports in the 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 30 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 per cent made up mainly of senior executives. As the OECD recently reported, since 1990, 6 per cent of total national income has been shifted from wages to profits and the pay of the top 1 per cent 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 30-year period, the average hourly wage of full-time workers rose by just 14 per cent (and that includes the top 1 per cent). This compares to growth of over 50 per cent 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 U.S. Bureau of Labor 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 per cent in U.S. dollar terms, while U.S. unit labour costs fell by 10.8 per cent. That is a huge loss of competitiveness compared to the U.S. and countries like China, which more or less peg to the U.S. 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 per cent, 2002 to 2010. The appreciation of the Canadian dollar against the U.S. 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 U.S. manufacturing rose by 47.1 per cent compared to a meagre 10.0 per cent 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 per cent, below the increase of 31.2 per cent in the U.S. 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 per cent in Canada, 2002-10, compared to 10.2 per cent in the U.S.

So, Canada's massive loss of competitiveness against the U.S. and countries that peg to the U.S. 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 overpaid Canadian workers.

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

This article was first posted on Behind the Numbers.

Photo: Carissa Rogers/Flickr

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