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Falling real wages signal trouble ahead

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The Labour Force Survey for August showed that average hourly wages were up by just 1.4 per cent from a year earlier, the same low level of increase as was registered in July. Consumer price inflation was 2.7 per cent in July, a bit down from 3.1 per cent in June and 3.7 per cent in May, but it seems that we have entered a period of falling real wages.

The picture is not much brighter if one looks at average weekly earnings, a function of hours worked and hourly wages. Average weekly wages in both July and August were up just 1.7 per cent from a year earlier.

If this trend continues, it is likely to further undermine a weak recovery, negatively impacting upon consumer spending and perhaps serving as the tipping point to deflation of the housing bubble.

An analysis by the National Bank of Canada suggests that the downward trend in average hourly wages in July can be traced to lower wages in manufacturing, and to a shift in jobs to lower-wage industries.

The LFS data are not the first to pick up a shift to a significant decline in real wages. Union wage settlements averaged 2.0 per cent in the second quarter of this year, and just 1.3 per cent in the first quarter. (In both quarters public settlements were lower than private settlements.)

The Labour Force Survey data precede most other economic indicators. Falling real wages and flat employment growth in the first two months of the third quarter following a negative second quarter can only raise fears of Canada entering a recession.

This article was first posted on The Progressive Economics Forum.

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