I bet you didn’t know Canadian wages increased during the recession

For those who kept their job, it’s been sort of a sweet ride

by Stephen Gordon

We all know that employment falls during recessions, and many probably think it is equally evident that wages do as well. To be sure, there is downward pressure on wages, but sometimes the effect is barely perceptible.

Here are the year-over-year growth rates of average hourly wages. The blue line is Labour Force Survey (LFS), and the red the Survey of Employment, Payroll and Hours data (SEPH). The two data sources use different methodologies — the LFS surveys households, and the SEPH surveys firms — and since there’s no obvious reason for using one and not the other, I’ll use both in this post.

Source: LFS, Cansim Table 282-0069; are from Table 281-0029. Data are not seasonally adjusted.

Both series are quite volatile, but you can still see a reduction in wage growth in 2009. But wage growth picked up in subsequent years. If you smooth the not-seasonally-adjusted data by taking 12-month moving averages, it’s hard to detect a sustained reduction in nominal wages — or even in nominal wage growth —  since the onset of recession:

This response or rather, lack of a response of wages to the decline in employment is one of the more enduring features and puzzles of macroeconomics. (In fact, it is arguably the reason why macroeconomics became a field of study in its own right.)

But changes in nominal wages (i.e. the dollar value of wages not adjusted for inflation) aren’t the same things as changes in workers’ buying power. Here are average hourly wages scaled by the Consumer Price Index (CPI), the most common measure of inflation, and expressed in constant 2012 dollars:

The fact that workers’ purchasing power has increased during the recession will doubtlessly surprise many readers. But this increase in real wages is entirely understandable when you remember that one of the effects of the recession has been to drive CPI inflation below the Bank of Canada’s 2 per cent target. If you combine steady nominal wage growth with lower inflation, you get an increase in real wages. In order words, Canadians’ paycheques kept climbing but the price of the stuff they buy rose more slowly.

Still, that’s not the whole picture. The graph above is for hourly earnings — but one of the effects of the recession was to reduce hours worked. So here are average real weekly earnings:

It’s interesting that the slight dips in buying power occurred in 2011, after the jobs lost during the recession had been recovered.

Another consideration: So far, we’ve been talking about averages, which can be skewed by values at top or bottom end of the spectrum. What about the typical worker — or, statistically speaking, what about medians? The SEPH doesn’t sample workers, so it doesn’t provide data for median wages. The LFS does. Here are the real median hourly wages and weekly earnings:

The immediate effect of the recession was to sharply increase real wages, which goes a long way in explaining why employment growth has been so slow over the past few years. The quantity of labour demanded falls when real wages rise even — or perhaps especially — during recessions.

Monetary policy hasn’t quite worked as expected in the latest downturn. Normally, the Bank of Canada lowers interest rates during recessions in order to maintain its inflation target. This time, however, the Bank’s interventions were not enough to prevent inflation from drifting below two per cent during the past year or so.

If you were able to hold onto your job throughout the recession, you might well be in better financial shape now than you were four years ago: Not only has lower-than-expected inflation increased the purchasing power of your earnings, lower interest rates have also made it easier to service your debts.

The problem, of course, is that these charts are for wages, not incomes. There’s little consolation in knowing that wages have risen if you’re still unemployed.




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I bet you didn’t know Canadian wages increased during the recession

  1. “The fact that workers’ purchasing power has increased during the recession will doubtlessly surprise many readers.”

    The real question is: what is the source of the wage growth? According to The Economist, there were three factors that made Canada an “economic star” during the Great Recession: a resource boom and “policies—such as bank regulation and sound public finances—which predate Mr Harper.”

    A construction boom has also been a source of rising unskilled wages.

    This statistical aberration makes for an interesting factoid, but it’s nothing we can hang our hats on in the way of future wage growth and wealth creation.

    For those of us who don’t believe in the free-market tooth fairy, the Canadian government is sorely lacking in economic vision, especially regarding the shrinking middle class and anemic productivity growth (which threatens future wage growth according to the Conference Board of Canada.)

    The Economist (2010): Canada’s resilient economy: The Goldilocks recovery
    http://www.economist.com/node/16060113

    • There is no real recovery in sight. Just BS and deceit from government. Government has a vision, get our money to fuel bloated government and then do as little as possible for it. Middle class is shrinking. Debt is growing. Fewer working. Inflation is much higher, StatsCan lies to keep us false happy.

      In time Canada can expect its standard of living to decrease. Its going to be some mix of high real inflation that out paces net wages, yep, more wages that don’t buy as much. Sure, some will see it much better, but I mean averages.

      With bankrupt pensions, expect senior poverty to increase from interest rate fraud. All these pensions with returns below inflation+taxes are slowly going to require more inputs and pay out less as it isn’t worth owning money any more, it depreciates too fast.

      No big disaster will happen, just a stedy decline in standard of living, as Ottawa can just dilute the currency and print more to devalue us.

  2. I knew that wages increased during the recession, but they still hold less value. I also know StatsCan lies its head off about inflation, as real inflation is triple the StasCan rate. Given more are retiring, fewer have the skills and some are tired of working for the governemtn without the benefits, well, there is technically a skilled worker shortage.

    You want to retain skilled workers with portable skills, you better pay them or expect to lose them.

    But this story doesn’t mention is that when higher paid people leave, the replacements are often lower paid. Or they lay off higher paid deliberately so they can hire 2 cheaper.

    What really matters are raw statistics governemtn does not disclose. Such as how many people paid taxes last month and how much revenue it generated. How many people are on FN, welfare and other social assistance, and how many are eligible to work, and working.

    We get the GDP and employment numbers. Employment being a cooked number of low value as it doesn’t include workers not on EI. GDP is about money, not about economy.

    GDP is BS, if GDP goes up 2%, but the actual goods shipped and consumed are less, then inflation depression is the result. But the GDP looks good.

    If wages or investment incomes are not higher than real inflation+taxes, you are losing value and for most Canadians, you are losing value now for 7 years running.

  3. BoC calculator says 2012 was 1.32% inflation. I say BS. Maybe KD and bananas were 1.32%, but these are small items. Me, property taxes 6.5%, home insurance 12.2%, car insurance 5.5%, utilities 13.7% (more tax greed added), food 7.2% (I have receipts)…

    I challenge government to show how they arrive at 1.32% inflation as nothing significant in my budget shows 1.32%…. so I say to StatsCan, you are full of crap.

    But hey, government manages us, and expects the deception to work. But not on me, I realize we are being screwed.

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