Why wages have risen in a cratered energy sector

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Most Canadians are aware of the economic pain bearing down on energy producers. But few would guess the surprising way in which they're dealing with it: by actually increasing wages and hours.

Employees in Canada's mining and energy sector still earn the fattest paycheques in the country. Average weekly earnings in September of this year were $2,059 (seasonally adjusted). No other sector is even close, and wages are more than double the national all-sector average of $957. Even more curiously, wages in mining and petroleum are 17 per cent higher than they were five years ago.

This presents a bit of a paradox. The energy sector – which has gone from Canada's economic leader to laggard in two short years – is still home to high and rising wages. How does this make sense? Shouldn't wages be tumbling as oil producers scramble to get their costs down?

There is an explanation. Wages may still be high, but the head count has been dropping like a stone. From its peak two years ago, Canada's energy and mining sector has shed over 48,000 jobs, a drop of more than 20 per cent. The situation has been most acute in Alberta, the centre of Canada's oil and gas sector. In that province, employment in the petroleum sector has dropped 29 per cent, meaning almost one in three jobs in the industry have vanished.

This tells us three things about the energy sector and how it's fighting to regain profitability.

The first is that for energy companies, it's smarter to hand out layoff slips than to cut wages. Perhaps because of the nature of much of the work involved in resource extraction, lower pay isn't a practical solution. Only a certain kind of person is able to either manage the physicality of the work (on oil rigs, for example), or possess the right technical skills and education (such as geologists and engineers). Cutting pay across the board would make it difficult to hold onto your star employees. Better to cut the ones you can still function without than risk losing your best talent.

The second thing we learn is that there were plenty of labour efficiencies to gain – particularly in oil extraction. If CEOs in the energy patch were honest, they'd likely concede that they hired too many people during the good times in the five years leading up to the oil price tipping point in June, 2014. Canadian producers are still producing the same volume of oil that they did when it sold for 100 (U.S.) a barrel – but they're doing it with 20 per cent fewer people. Many of the job losses have been concentrated at the head-office level, with fewer people required to work on future projects. Most of those high-cost projects have been cancelled.

The third thing we learn is that employees still fortunate enough to have their job are working longer hours, which partially explains the higher weekly earnings. Over the past 12 months, the average work week for workers in oil and gas extraction is about 2 per cent longer than it was five years ago. That makes sense considering the same amount of work needs to get done but with 20 per cent fewer workers. Calgary's energy sector workers were famous for enjoying every second Friday off – something that has been scaled back or eliminated at many companies.

Conditions may be starting to gradually improve. The OPEC production limits and two pipeline project approvals announced this week offer some silver lining for Canada's oil producers. Still, keeping costs contained and efficiencies up will remain the modus operandi for the sector in 2017. If the experience over the past two years is any indicator, don't expect big wage cuts in the petroleum sector any time soon.

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.