Who says rising wages are bad? - Macleans.ca

Who says rising wages are bad?

Mike Moffatt on the up side of the skills shortage


Other than “middle class economics” there was no economic concept that this summer received more press than the “skills gap.” But in so doing, there were a number of misperceptions introduced into the debate that could use some clarification and, yes, challenge.

The Conference Board of Canada led the discussion with a well-researched report titled “The Need to Make Skills Work: The Cost of Ontario’s Skills Gap,” which talks about “looming labour shortages” in some industries, with the possibility of “500,000 skilled vacancies.”

To an economist this talk sounds a bit strange. If quantity demanded outstrips quantity supplied for a good or service, the price of that good or service should rise to the point at which the surplus is eliminated. That should not be a controversial observation. In fact, the Conference Board report itself describes this phenomenon:

A recent analysis from Benjamin Tal of CIBC shows that, nationally, at least 25 occupations are experiencing both “rapidly rising wages and low or falling unemployment rates”—a combination of indicators that points to skills shortages. This group of occupations has an unemployment rate of just over 1 per cent and wages that are “rising by an average annual rate of 3.9 per cent—more than double the rate seen in the economy as a whole.”

I can think of three reasons why these rising wages are viewed as a problem, though two of them are about perceptions rather than realities.

1. Easterbrook’s Law

If labour market pressures are causing unemployment to rise and wages to fall, then naturally you will get stories such as “Study Says Louisiana Faces Stagnant Wages, Rising Unemployment,” “More Britons fall below level of Living Wage” and “Report: 25% Of NJ Struggling To Make Ends Meet.” You would therefore think that, by contrast, labour market pressures that reduce unemployment and cause wages to rise would be heralded as positive developments.  But that’s not how economic reporting works, as illustrated by Easterbrook’s Law, which can be neatly summarized as “all economic news is bad.” Instead of higher wages being presented as a good news story we are told that it indicates a “skills gap,” that rising wages will reduce the “competitiveness” of Canadian businesses and that the economy will suffer.

2. Our typical experience is with downward wage pressures

Wages tend to grow along with the economy, but a number of factors, most notably technological change and globalization, have ensured that for most classes of workers wages have grown slower than productivity gains. We are simply used to downward wage pressures for jobs that can be replaced by machines or someone overseas, with vastly increasing salaries for those who can take advantage of the superstar effect. Outside of aberrations such as Fort McMurray, we are unaccustomed to thinking about upward wage pressures for non-superstars, so it should not be entirely surprising that we see this as unusual and a problem to be solved.

3. Imperfect labour markets

There is, however, a potentially valid reason to be concerned. The Conference Board report identifies a number of possible labour market imperfections such as workers lacking the information they need to make informed decisions. Certainly our labour markets have imperfections and can be improved, so reforms should be considered. However, couching the discussion in terms of “skills gaps” and rising wages is misguided. We should not be trying to fix market imperfections because they are causing wages to rise; rather we should seek to improve markets and promote economic efficiencies regardless of how the reforms affect wages. Furthermore, we should be seeking out all imperfections, not just ones correlated with rising wages.

I have yet to see any evidence that labour market imperfections can be blamed for the bulk of rising wages, particularly for professions identified by the report such as “account manager” and “financial planner.” We should not fear but rather embrace upward wage pressures as a positive development that raises the standard of living for Canadians.

This article appeared first on Canadian Business.


Who says rising wages are bad?

  1. Who says rising wages are bad?
    No one, really. I’ve never heard of “Easterbrook’s law” but, not surprising there is a law in economics for every piece of normal day life.
    1. Eastman’s Law
    Never rely on a picture of a strawman for setting policy as you won’t know whether he was stuffed using hay made only when the sun was shining.*
    *especially in SW Ont cornfields

  2. “But that’s not how economic reporting works, as illustrated by Easterbrook’s Law, which can be neatly summarized as ‘all economic news is bad.’ Instead of higher wages being presented as a good news story we are told that it indicates a ‘skills gap,’ that rising wages will reduce the ‘competitiveness’ of Canadian businesses and that the economy will suffer.”

    Is there any law which says ideological economists tend to make lame generalizations?

    The standard view of macroeconomics is that a country needs gains in productivity to justify/sustain rising wages. If wages are inflated because there’s a shortage of skilled workers, that is a market distortion which will correct itself in a negative way: businesses that require skilled workers will pack up shop and locate to where they have them at a reasonable cost.

    So a good idea is for government to match post-secondary education and worker training with market needs and make education and training more accessible.

    Also in Canada we’ve seen a rise in wages of unskilled workers due to construction and resource booms over the past decade. This kind of wage growth is not sustainable in the long term. The booms will come to a bust. The lack of contemporary economic development will hurt productivity and cause us to fall behind the rest of the developed world.

    • The lame economists are usually university professors with a liberal BS attitude, and they know much of their wages are paid by government.

      Best economists I know work for themselves and not beholding to corporations, governments or universities.

      You and I agree on this point, I am sure… Canada is not on a sustainable path and clouds are growing over our heads. Unlike Greece, Ottawa can print money to drive inflation tax on all, and devalue wages, pensions etc. by passing on the debt fraud as inflation that exceeds net wage growth.

      It is also why immigration is loose as a goose. With domestic baby production below 1.5 kids per family, as we have too many Ottawa kids to support, Canada has to let in lots of immigration to avoid an implosion. But as Canadians earn less net after tax value, Canada increasingly becomes less attractive. For the most part, our immigration is what the USA doesn’t get. You got talent, you go to USA first.

      Our system we know today is far from sustainable, just a mater of time now as to when it fails.Show me nations doing well, they have less government, show me nations in trouble then you have bloated over taxing governments with tax inflated economies.

      But we are well conditioned to be compliant government tax sheep.

  3. I’d only be worried about rising wages for jobs like account manager and financial planner because these are middlemen, and if their wages are rising, there’s probably creeping inefficiency or friction allowing middle men to thrive.

    • But they add little to no value. A false virtual economy of non-productive BS.

      People need to learn to manage their own money. Or race losing value to inflation. I just reamed out a TD wealth advisor some 2 months ago, as he tried to talk me into 5% returns and 2% MER, which is a pathetic return because the net gain after taxes and expenses was well below real inflation+taxes. One of the two even admitted off the record I was right.

      The way I manage my portfolio, I have outperformed all bank offerings and the TSX for 25 years now. And I have no MERs.

      How I do it is simple. I say 2008 coming as early as 2006 Bernanke starting money print for debt fraud. So later in 2006, 7 and early 2008 I liquified to a large cash position, just in cash for the crash. Then in jan-Mar 2009 I bought back in on the lows and made off like bandit while most people lost money.

      But I don’t listen to liberal-economists in banks, universities and governments, as they are really fraudsters. When Flaherty said buy in Sept 2008 I knew being in cash was the right thing to do.

  4. Rising wages are deceptive. The reality is government lies about inflation.

    Sure, to an individual rising wages are needed to cover for inflation. And in order to have the value in net income, raises need to be higher than real inflation as the last dollar earned is taxed more than the first dollar earned. To get the net income, you need bigger raises than most get today.

    Inflation is a government tax, compounding each year, it is designed to keep people working poor and devalue debt. Government doesn’t tell you, but debt gets inflation down the road. Cheap fraud low debt is not free or cheap, just a mater of who and how it is paid for.

    Imagine if in 1971 you bought $35000 of 1000 ounces of gold. Today that would be worth $1.4 million. Gold has the same value, buys about the same in 1971 as it does today, as it did in the Roman Empire. Gold lasts. Fiat fraud currency depreciates. So does your incomes after taxes.

    Gold didn’t go up in value, fiat currency became worth less.

    So when you get a raise, say 2%, you really got a 1.1% raise on net earnings. And while governemtn says inflation is less, I say BS, just look at the big items in your budget like property taxes, utilities and taxes, insurances, cars, homes… fact is the governemtn has no end of lies and deception, you are being (on average) devlaued by bankrupt government.

    I say bankrupt, as no legitimate lender is really buying government debt to lose value on returns that are below inflation+taxes.

  5. Not bad at all if your are getting them but the reality is that it goes to real inflation.

    Fact is 90% of the people are getting net wage increases below REAL inflation and pensions, savings are being devalued. People earned this money are now seeing less value for it. Huge fraud really.