Are wages going to pick up steam in 2018?
Canada’s economy grew impressively in 2017, creating over 420,000 new jobs during the year. As of January, the national unemployment rate has fallen to 5.9%. If the labour market is tightening, then we would normally expect wages to rise as bargaining power moves into the hands of workers. However, we haven’t seen a strong upward move in wages and we believe this is due to structural changes in the economy. Nevertheless, entrepreneurs should be preparing themselves for more pressure for wage increases this year.
Labour demand has been strong, especially in certain sectors
Despite the increase in hiring last year, the number of unfilled advertised jobs remains high, hitting 468,000 nationally as of the third quarter of 2017, with the biggest increases in Quebec followed by British Columbia and Ontario, according to Statistics Canada.
Many businesses are concerned about labour shortages. Over the past five months, roughly 60% of small business owners have consistently reported that shortages of both skilled and low or unskilled workers are limiting their production and sales, according to the Canadian Federation of Independent Businesses (CFIB).
While there is much variation between provinces, the sectors with the strongest demand for labour include manufacturing, transportation and warehousing, accommodation and food services, and healthcare and social assistance.
Labour supply has been slowing
Baby-boom generation workers are retiring, and the next generations coming up to replace them are smaller, creating a gap.
The younger cohort—the Millennials and Generation Z (those born after 2000)—represents close to 50% of the working age population. One reason keeping wages low for this cohort could be that they are still developing their experience and may not be in the best bargaining position to demand pay increases.
The phenomenon of a large retiring generation and a smaller replacement generation is more acute in some provinces than in others. In Quebec, Nova Scotia, New Brunswick and Newfoundland, the working age population has actually been declining over the last few years, and a reversal is unlikely unless immigration picks up significantly.
If the labour market is tightening, why haven’t wage increases been stronger?
Three factors weighing on wage growth
Technology and globalization have changed the labour market: Labour markets in developed countries have changed over the past 20 years due to advances in technology and the impact of globalization. While the automation of many routine tasks has made businesses more efficient, it has also reduced the number of workers required for a given level of production. The combination of automation and offshoring production to lower cost countries has resulted in the decline in middle-skill jobs. Many of the workers in those jobs have either left the labour force or found part-time work and temporary contracts in lower skill jobs, and an increasing proportion of which are in the services sector. This phenomenon has contributed to some downward pressure on wages.
Slow productivity growth hinders wage growth: Once an economy is at or near full employment, a key driver of wage gains is the trend in productivity growth. Higher labour productivity increases firms’ profitability and eventually leads them to add more workers to continue growing their business. With higher profitability, companies can offer higher wages to attract the new workers they need. Canada’s annual productivity growth has averaged an anemic 0.4% since 2011, far below the 3.2% of the 1960s and the 1-2% from 1970 to 2010, according to analysis by Desjardins. This slow growth has hindered wage growth.
Workers’ smaller share of returns from growth: Labour’s share of Canadian GDP has declined from 61% in 1991 to 56% in 2013, similar to trends in other developed countries, according to the International Labour Organization. This means that today, when firms’ productivity and profits improve, a greater proportion goes to shareholders, as opposed to workers, than in the past, keeping downward pressure on wages.
Why wage growth ought to strengthen in 2018
While changes in the structure of the labour market have kept downward pressures on wages over the past number of years, the strengthening economy is steadily reducing the number of underutilized workers, i.e., “labour market slack” such as people working part-time but who would prefer full-time work. A sign that the labour market slack is being absorbed is that over 90% of the jobs created in 2017 were full-time jobs. This year, we expect that the combination of the absorption of this labour market slack and the demographic challenge posed by the retiring baby-boom generation will outweigh the structural changes (discussed above) and that will put upward pressure on wages.
To wit, a survey by CFIB in January indicated that about 40% of businesses expect to raise wages by 3% or more over the next 12 months, with the majority expecting to raise wages by 5% or more.
Besides pressure from a tighter labour market, minimum wage hikes across the country are also driving wage increases, most significantly in Ontario, Alberta and Quebec. When wages rise for the lowest paid workers, those earning close to that wage also receive increases. Minimum wage increases will likely result in raises for about 11% of Canada’s workers, according to the Bank of Canada.
Wages should increase for workers, especially in sectors in high demand such as finance, real estate and wholesale trade. The provinces with the strongest demand and the smallest working age populations will experience the most intense pressure for higher pay, namely Quebec, British Columbia and Ontario (see graph). However, the strength and duration of pressure for higher wages will depend on whether investments in capital and skills training generate higher labour productivity and greater economic growth.
What does it mean for entrepreneurs?
Be ready to raise wages and offer more benefits to employees, especially when you are operating in a sector where talent is in demand.
Invest in technology and training to enhance the labour productivity of your workers to ensure your workforce stays competitive.
Understand the demographics for your available labour pool to anticipate changes in wages in your industry moving forward. Check out Statistics Canada’s Age Pyramid comparison tool for your metropolitan area.
Read what other entrepreneurs are doing to manage in this challenging labour market in BDC’s report: Future-proof your business—Adapting to technology and demographic trends.