Focus
November 26, 2021 | 12:32
Raging Wages Not Racing North… For Now
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Raging Wages Not Racing North… For NowThe October employment reports showed a wide gap between U.S. and Canadian wage gains. South of the border, average hourly earnings were up 4.9% (Chart 1). Before the pandemic, this would have been the largest annual change since these data started in 2006. Average hourly earnings for production and nonsupervisory employees (with its longer history) were up 5.8%. This is the strongest wage growth since 1982, apart from a two-month pandemic spike. |
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In stark contrast, average hourly wages in Canada were up just 2.0%. During the months before the pandemic, when jobless rates were plumbing multi-decade lows on both sides of the border, this Canadian rate was running about one percentage point above the U.S. pace, making the current contrast more striking. These ‘average’ wage metrics have been distorted by the pandemic. They were boosted at the onset by job losses being disproportionately larger in lower-paid occupations, only to be depressed during reopening as these positions returned. In Canada, the pandemic-related restrictions were generally more stringent than those in the U.S. and took longer to be lifted. This amplified and prolonged the ‘whipsaw’ effect. Looking at two-year rates of change allows us to bypass these distortions. In this light, Canada’s wage growth gap is not as stark, at 3.7% annualized versus 4.7% in the U.S. Among the other major wage metrics, the pattern of U.S. growth rates accelerating, hitting extreme highs in some cases and, collectively, running faster than Canada’s growth rates (admittedly with some less timely Canadian figures) is apparent (Table 1). For the U.S. measures, the yearly changes are nearly all above the annualized two-year changes emphasizing recent acceleration, despite the influence of reopening downswings on some measures. ‘Weighted’ metrics, such as the Employment Cost Index’s wages & salaries component, aren’t influenced by compositional shifts in employment. It was up 4.2% in 2021Q3, matching the fastest rate in exactly 31 years. For the Canadian measures, the yearly changes are nearly all below the annualized two-year changes, influenced by the prolonged reopening process. Average hourly earnings, also on a weighted basis, were up 2.6% in Q3 (and 3.1% in September alone), again revealing a less stark, but still large, wage growth gap with the U.S. Relatively faster U.S. wage inflation is indicative of a relatively tighter labour market, which is not revealed by the unemployment rate (Chart 2). Indeed, Canada’s jobless rate has moved down in lockstep with the U.S. rate apart from a couple bumps along the way reflecting toggling restrictions. One must dig deeper into underlying demand and supply to reveal America’s tighter labour market. However, as indicated by job vacancy rates, the demand for labour has strengthened substantially on both sides of the border (Chart 3). It’s worth noting that, in the wake of Canada’s delayed full reopening, the job vacancy rate has been escalating during the past couple months, narrowing the gap with the slightly slipping, but still very elevated, U.S. vacancy rate. Despite facing their own labour constraints, Canadian employers have been more successful than their U.S. counterparts in attracting workers, resulting in superior employment outcomes. The employment-to-population ratio was 61.0% in October (0.8 ppts below its 2020 high) compared to 58.8% in the U.S. (2.3 ppts below). Meanwhile, Canadian population growth (at 0.9%) was more than double America’s clip. For Canada, household-surveyed jobs have fully recovered (now 0.2% above the 2020 peak) with establishment-surveyed jobs (lagged by a month) just 1.8% shy. South of the border, household- and establishment-surveyed jobs are still 3.0% and 2.8%, respectively, below their 2020 peaks. The supply response is where the difference between the U.S. and Canadian labour market really stands out. At the pandemic’s onset, the participation rate plummeted on both sides of the border, with Canada’s descent relatively larger (Chart 4). After Canada’s part rate initially snapped back, it suffered a couple setbacks—those toggling restrictions again—and currently stands at 65.5%, just 0.2 ppts below the 2020 high. In fact, it hit that mark in September before dipping in October. It appears that Ottawa’s pandemic support programs, such as the Canada Emergency Wage Subsidy and the Canada Emergency Response Benefit, proved more effective at keeping would-be workers attached to the labour force than the programs that came out of Washington. Meanwhile, some of the other factors depressing the U.S. part rate may have been less pressing north of the border. The U.S. participation rate stood at 61.6% in October, 1.8 ppts below its 2020 high. If the part rate was currently at its 2020 peak (and given interim population growth), the U.S. labour force would be 4.5 million larger. |
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According to the Bureau of Labor Statistics, 1.3 million individuals indicate that they are not employed or looking for work because of the pandemic, reflecting things like childcare availability or health and safety concerns. We suspect this number is significantly underreported. Furthermore, childcare considerations may be tied to another pandemic-triggered, labour-force-dampening U.S. trend. Some two-income households have been ‘downsizing’ to one-income families amid the recent exodus to bigger abodes (owing to working from home), often situated in less dense—and more affordable—areas. Canada has also been experiencing a housing boom during the pandemic, but we suspect it hasn’t been an income-downsizing catalyst. Currently, the average sales prices are US$373k and C$717k. |
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Another labour-force dampening U.S. trend is rising rates of early retirement. A St. Louis Fed study concluded that there were “slightly over 2.4 million excess retirements” during the pandemic period (through August 2021), accounting for more than half of the ‘lost’ labour force. Record high stock and home prices and their consequent boost to retirement nest eggs are cited as key reasons. The participation rate for individuals in the 55-to-64 age group has been trending down recently (Chart 5), despite continuing to trend up in Canada. Perhaps U.S. baby boomers ended up embracing the FIRE (Financial Independence, Retire Early) movement more enthusiastically than their Canadian counterparts. It’s unclear to what extent these trends will be permanent. In the meantime, with 8.8 million individuals no longer ‘on the dole’ after the federal pandemic UI programs expired in early September and ‘only’ 843k payroll jobs created in the past two months, these point to easing hiring pressures ahead. UI recipients should be, technically, included in the labour force because they are supposed to be looking for work. However, the sheer number involved and the inability to adequately verify job search likely resulted in some being counted in the not-in-the-labour-force crowd and thus part of the ‘lost’ labour force that’s coming back. The cresting of U.S. wage inflation could soon be at hand. However, this might not be the case for Canada. The post-reopening ramp up of hiring intentions has coincided with a surge in wage growth. In the three months ending October, average hourly wages have grown at a 9.4% annualized rate, with average hourly earnings growing 7.7% in the three months ending September. These official figures are not seasonally adjusted, and we get 6.5% and 7.2%, respectively, after the effort. We suspect the start of such frothy shorter-term wage measures, given their potential implications for the inflation process, did not go unnoticed by the Bank of Canada when it recently decided to end QE and signal rate hikes starting as early as next April. |