Pay increases in Canada and the United States are stalling, in yet another threat to a recovery that already promises to be hard and slow.
The stagnation in wage growth over the past few months is heightening fears over the strength and mindset of consumers as employees accept pay freezes in many industries and outright cuts in others.
The concern is that industries slashing wages will set a trend that becomes contagious. While cutting costs makes sense at a company level, it's dangerous for the economy as a whole. For employees, repairing balance sheets is more difficult with a wage cut. And consumer spending, which needs to revive for recovery to take hold, could take a further hit.
“Wage deflation is the real issue,” a recent report from London-based Capital Economics stated, highlighting a troubling disconnect between policy-makers' focus on exit strategies, and their fear of inflation after the recession, and the reality facing companies and their work forces now.
Anxiety among consumers over wage deflation has a ripple effect: As unemployment mounts, employers gain an upper hand in a slack job market and tend to salvage what they can of profits by slicing salaries. Workers, who have to pay the monthly bills and already have seen their net worth erode, build up their savings.
The risk that falling wages will trigger a deflationary spiral is far greater than the inflationary threat from the monetary side
The deflationary spiral that could be set off by wage cuts risks driving recessionary economies further into a funk.
“The creation of new money by central banks is a sideshow compared to the disinflationary pressures still building in the real world,” Capital Economics said. “In particular, the risk that falling wages will trigger a deflationary spiral is far greater than the inflationary threat from the monetary side.”
Wages rarely fall. Since the Great Depression, there has almost never been a sustained period of widespread wage deflation. But wages usually respond to recessions with a long lag. And evidence is mounting that take-home pay in Canada and the U.S. is the recession's latest victim.
Canadian labour income dropped in the first quarter of 2009 for the first time in recent history.
Between January and June, according to Statistics Canada's Labour Force Survey, average wages fell a full per cent. This was mainly because wages for temporary workers – who are always the first to see changes in compensation – dropped 6.57 per cent. These numbers are not seasonally adjusted, so it's hard to know if they show the beginning of a deflationary problem or just a stagnation.
In a separate Statistics Canada survey of employment, earnings and hours, Canadian employees' wages rose slightly in March compared to a month earlier, but sank a bit in April.
However, the most common measure of wage momentum is to look at the year-over-year change as reported in the Labour Force Survey. It shows that average earnings were 3.5 per cent higher in June than a year earlier, a healthy increase, especially during a recession.
But economists say that measure is misleading because it captures all the raises handed out last summer, when high commodity prices were blanketing the country with money.
The ins and outs of various sets of data aside, the reports show that in the past few months, wages have lost considerable momentum, and are falling in some key areas of the economy.
Temporary workers and the goods side of the economy are feeling most of the pain, especially manufacturing and transportation, reflecting the high-profile woes of the auto sector. Accommodation and food, as well as the oil and gas sector, are also adding to the slowdown in wages.
“It [wage deflation] is not across the board, but it's not limited to one or two sectors either,” said Jim Stanford, economist for the Canadian Auto Workers.
