July 8, 2011 / 6:54 PM / 6 years ago

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

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.

Other elements of Friday report suggested the job market recovery is far from robust.

The average number of hours worked by Canadians each week remains below normal and was only 1.2 percent above year-ago levels, the slowest level of growth since March 2010.

“At the margin, this is negative for household income growth, which, in real terms, is already being squeezed by rising food prices and high energy costs,” said David Madani, economist at Capital Economics, in a research note.

Canadians are paying nearly 4 percent more for food than they did a year ago and 30 percent more for gasoline.

Bank of Canada Governor Mark Carney says those price shocks will be temporary. Some economists think the bank would be more concerned if wage pressures were to heat up and add further momentum to price increases.

“Probably the last thing they need is another headache from the wage side,” said Doug Porter, deputy chief economist at BMO Capital Markets.

CONSUMERS TAKE BACK SEAT

The Bank of Canada has already forecast that consumer and government spending will fade as a driver of the recovery, to be replaced by business investment.

Many economists say tamer consumer spending and housing market activity are only natural. Both surged in the initial phase of the recover and there’s not much more room to grow, they argue.

“That gig is up now, and I think we have a tapped out consumer that is also struggling with no left over wage gains beyond the cost of filling their gas tanks and grocery carts,” said Derek Holt, economist at Scotia Capital.

Carney is expected to keep interest rates on hold at the central bank’s next policy announcement on July 19. The timing of his next hike depends on how prices behave, as well as developments in the U.S., Europe and elsewhere.

Compared to the United States, Canada’s labor market is not in such bad shape. Not only is the 7.4 percent unemployment rate much better than the comparable U.S. rate of 9.2 percent, but wages and the number of hours worked were slightly higher in June.

Average hourly earnings in the United States actually slipped a penny in June and earnings have risen only 1.9 percent in the year.

It’s not uncommon for Canadian salaries to lag the broader recovery in employment. In the past, the employment rate and employment growth tend to lead wage growth by about a year, says Porter.

“We actually saw a very similar thing happen roughly 10 years ago in the last cycle. We saw employment sprint higher in 2002 and yet wages decelerated throughout that year and didn’t hit bottom until 2003,” he said.

Porter says it’s too early to sound the alarm on any negative impact on growth.

“I wouldn’t worry about it just yet. If we continue to see wage growth going nowhere and running below inflation for a long period of time, that would clearly shackle consumer spending.”

Editing by Jeffrey Hodgson

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