The global financial crisis delivered a right hook that rocked practically every facet of the global economy. In contrast to this shared descent, the pace of the subsequent recovery has varied widely by component. Whereas stocks seek new highs, home prices are buoyant and (U.S.) job creation has finally revived, global wage growth has remained groggy. This is particularly curious in Canada, where the economy has long since shed most of its slack and the demographically-adjusted unemployment rate is already effectively normal.
In our view, the outlook for Canadian wages rests on the interplay of two factors. The first is the extent to which a softer Canadian dollar reclaims prior lost competitiveness. Helpfully, some of this is now happening, even if its main effect is to render Canadians relatively less overpaid, as opposed to outright underpaid.
The second consideration is easily the more important of the two: the outlook for American wages. The U.S. remains the world’s bellwether economy, Canada’s largest trading partner, and a free-market crucible where wages, productivity and profit margins are locked in constant battle. Should U.S. wages emerge victorious for a change, Canadian remuneration will also benefit.
It comes as welcome news, then, that a constellation of factors finally point to accelerating U.S. wage growth.
First, the U.S. labour market is tightening. Bracing winter weather in North America had until recently obscured progress. Finally, job creation seems to be escaping from those icy tentacles, with a splendid increase of 288,000 jobs in April. We believe this approximate clip is sustainable given improving economic circumstances, delivering around three million new jobs annually. As the job market cinches tighter, this shifts the balance of power from employers to employees, boosting wages.
Second, we believe there is less slack in the U.S. economy than commonly imagined. The underutilization of labour and capital over the past six years has left behind the fetid scent of decay, on the order of a permanent 2 percentage point loss of output. Thus, upward wage pressures may be closer to fruition than they first seem.
Third, workers are becoming more confident. This is evident in the rising rate at which they voluntarily quit their jobs in favour of better opportunities. Beyond the obvious signal this sends regarding the rising clout of workers vis-a-vis employers, it also happens that voluntarily hopping from one job to another generates an average 8 per cent wage increase all by itself.
Fourth, salaries are already tentatively improving: private-sector hourly wages now rise by 2.3 per cent per year, finally outpacing inflation and notably improved from the mid-2012 1.3 per cent nadir. Historically, updrafts of this nature have been sustained for three to four years, suggesting that the acceleration is no more than half done. Strikingly, the U.S. Treasury Department reports that personal income-tax receipts rose 10 per cent over the year ending in the first quarter of 2014, hinting that traditional wage measures may be failing to fully reflect the extent of rising compensation. Providing regulatory support for higher incomes, a swell of U.S. states are in the process of raising their minimum wage, with many legislating further increases in over the next several years.
Fifth, surveys show a significant acceleration in firms’ wage-hike intentions, with household-based surveys echoing that expectation.
Sixth, some payback may be appropriate. U.S. wages fell excessively during the crisis, undershooting productivity by a cumulative 6.4 percentage points. Alas, half of the loss appears to be the product of long-standing structural drags such as globalization, automation and declining unionization. But the other half is credibly available for reclamation.
What of the counterpoint that the long-term unemployment rate remains too high to sustain any sort of wage renaissance? In actual fact, we find that the long-term unemployment rate has little bearing on wages, likely because these individuals have already been marginalized within the labour force. It is the short-term unemployed who matter for wage growth, and this group has been very nearly winnowed down to normal levels.
To be clear, nothing in this analysis argues for a structural upturn in wages (on this note, the depressive effects of globalization are helpfully waning, but automation’s effects may be strengthening). Nor does it present a serious remedy for inequality. But it is nevertheless good news for North American workers that wages are finally on the cusp of a cyclical upturn. Businesses may initially fear this development given the implication of diminished profit margins, but they will eventually find that rejuvenated consumer spending and snappier economic growth provides more than adequate recompense.
Eric Lascelles is chief economist at RBC Global Asset Management.