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A million jobs, but where’s the inflation?

In this unusual economic recovery, the line between job creation and inflation is neither short nor direct. But even though Canada has added more than one million jobs since mid-2009, the growth numbers in the labour market haven't produced much inflationary pressure. Policy makers must increasingly cast their gaze onto labour's most direct contribution to inflation – employee wages.

For those reasons, Thursday's Survey of Employment, Payrolls and Hours (SEPH) from Statistics Canada provides some encouraging glimmers that the job creation we've seen thus far is beginning to translate into wage pressures – although some pieces of the puzzle are still missing.

Average weekly earnings, including overtime, were up 2.5 per cent in November compared with a year earlier – the fastest pace in six months. In November alone, average weekly wages jumped 0.9 per cent.

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By province, the fastest year-over-year growth was in Saskatchewan (up 4.7 per cent) and Alberta (up 3.7 per cent). It's no coincidence that these provinces also have two of the highest inflation rates in the country (2.3 per cent and 2.1 per cent, respectively – almost double the national inflation rate of 1.2 per cent).

Piecing together the evidence, one possible conclusion is that, as employers have slowed their hiring in recent months, they are stepping up overtime to fill their labour needs (a sign that their operations may be starting to run closer to capacity, another key indicator of inflationary pressure). Statscan data show that average hourly earnings excluding overtime have barely moved in the past six months, but average earnings including overtime are up 1.2 per cent.

Curiously, though, the November wage growth came despite a drop in average weekly hours worked (to 33.1 from 32.8 a year earlier). This would seem to contradict the notion that overtime has been ramped up. However, given that most of the job growth in the past year has been in part-time positions, this could be a function of overtime shifts being spread among part-time workers.

The big question is why this solid and accelerating wage growth has still had only a muted impact on inflation.

A key clue lies in the fact that wages in the retail sector itself (the single biggest sector of employment in this country) are lagging far behind the national trend. Average weekly earnings (including overtime) for retail workers rose a thin 1.0 per cent in the 12 months to November. Weekly earnings in accommodation and food services were down 1.1 per cent.

These are the two sectors of the SEPH that have an immediate effect on the Canadian consumer. Retail and hospitality-industry employers don't have any labour-cost increases to pass on to consumers – one good explanation for why consumer prices are going nowhere.

But we are seeing wage pressures building further up the pipeline, that presumably will inevitably work their way to retailers in the form of suppliers passing their costs . Wages in the wholesale trade were up 4.1 per cent year over year in November; manufacturing wages were up 2.7 per cent.

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There have been reports that retailers, themselves embroiled in a price war amid growing competition from recently arrived U.S. competitors, are leaning hard on suppliers to keep their prices down. This may well be delaying the transmission of wholesale wage costs to the retail sector and to consumer prices.

Nevertheless, the wage pressures are becoming more visible. Eventually, they will work their way to consumers. Still, until signs of inflation become clear and unambiguous, the question the Bank of Canada will continue to ask is, how long will this take?

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