Analysis: Canada's wage moderation a double-edged sword

Fri Jul 8, 2011 2:48pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Louise Egan

OTTAWA (Reuters) - News of slowing wage growth in Canada is a gut-wrenching reminder that tough times are not yet over for consumers, even though the central bank charged with controlling inflation might take comfort from the trend.

Data released on Friday contained good news on the employment front -- a bigger-than-expected job gains of 28,400 in June that contrasted sharply with weak U.S. job growth.

But the report also confirmed the pay of Canadian workers is rising much slower than prices. Wages grew by an annual 2 percent in June. That compares with inflation rate at an eight-year high of 3.7 percent.

The wage data looks good on paper for policy makers. It offsets high prices for gasoline and food and should help the Bank of Canada bring inflation back to its 2 percent target without having to quickly ramp up interest rates.

But that may not soothe middle-class Canadians who are back at work after the recession and seeing their purchasing power eroded, says Sylvain Schetagne, senior economist at the Canadian Labor Congress.

"That's a problem," he said.

"There's no growth that can come out of it. Wages have to at least follow inflation or be above it ... so that we can continue to spend a bit more to grow, not only grow because we are more (workers) but grow because we're more productive and make more money."

Looking further out, both market and labor economists agree that an extended erosion of real wages could discourage consumer spending. This would further weigh on an economy still a long way from operating at full capacity.   Continued...