A new report from TD Economics suggests the Canadian economy might not have to wait much longer to see wage growth pick up.
Despite a persistent labour shortage and a general resilience in the labour market (aside from January’s job losses), wage growth in Canada has been an ongoing soft spot in the economy and has failed to keep pace with the rising cost of living.
Over the last 12 months, the report points out average hourly wages have grown 2.4 per cent – a big slowdown compared to 5.5 per cent growth in 2020 and a 3.8 per cent rise in 2019. Meanwhile, consumer prices in Canada have surged by levels not seen in decades.
So far, high labour force participation rates and the start-stop nature of our economy stemming from lockdowns throughout the pandemic have been suppressing wages, the report said.
But that might be about to change, according to TD Economics Senior Economist James Orlando, as Canada moves past these issues this year, “despite the setback in January.”
“From our lens, this means that higher wage growth could be just around the corner. The cyclical indicators are pointing to this outcome,” Orlando said in the report, which was released Friday.
Orlando said the number of hours worked by employees has been rising and should continue to increase now that the worst of the Omicron impact appears to be in the rearview mirror. He also said there’s a rising number of Canadians who have quit their jobs in search of better-paying, full-time positions. The share of full-time employment has also reached similar peaks compared to the previous three business cycles.
“This peak correlates well with the unemployment rate and has historically served to confirm that the Canadian labour market has reached full employment. This could further boost wages as full-time workers tend to have more bargaining power than part-time workers,” he said.
After some model simulations, Orlando concluded labour market improvements take around six months to filter through to wages.
“Though that seems like a long time, it means that wages at the end of 2022 should see a notable move upwards,” he said. “How high wages get will be highly dependent on how much more improvement we see in employment.”
He tested three scenarios and found even if the jobs market holds steady at 2021 year-end levels, workers can expect wages to rise about four per cent this year. If the economy improves more than expected, that number could rise to as much as five per cent.
“With the labour market tight and inflation at five per cent, it is surprising that wages have failed to keep up. That looks about to change. Workers have not had this level of bargaining power in decades,” he said.
“Though there have been some factors delaying the growth of wages, our analysis shows that workers will likely see significant wage growth in 2022.”
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