MNI ANALYSIS: Canada Wage Growth A Rare Area of Slack

By Yali N'Diaye

     OTTAWA (MNI) - While the Canadian economy is close to its full potential

and inflation to its 2% target, the Bank of Canada continues to stress wage

growth is not where it should be at this stage of the cycle, but the latest data

could make that view evolve.

     Along with concerns over trade protectionism, subdued wage growth is a

central reason the BOC still believes accommodation is needed despite the

ongoing normalization process.

     "Wage growth has firmed, but remains lower than would be typical in an

economy with no labor market slack," the BOC repeated in its March 7 policy

statement.

     So in its March 7th policy announcement, the central bank still saw reason

to keep "some continued monetary policy accommodation (...) to keep the economy

operating close to potential and inflation on target," especially amid increase

uncertainties relative to U.S. trade policy and NAFTA.

     --LABOR FORCE SURVEY

     On Friday, Statistics Canada reported that average hourly wages for

permanent workers slowed to 3.1% in February from 3.3% in January.

     However, the last data point is not enough to call the end of an

accelerating trend that started in May last year, when wages rebounded 1.0% from

0.5% in April. 

     Since then, the year-over-year wage growth has been picking up

consistently, reaching 3.3% in January, the highest rate since March 2016.

     --PAYROLL SURVEY

     The payroll survey has sent conflicting signals, with an acceleration in

the growth pace of average weekly earnings in August through October 2017, when

it reached 3.1%, and a slowdown since then to 3.0% in November and 2.3% in

December, the last data point available.

     The BOC has developed a "wage common" measure, to capture underlying wage

pressures from different data sources, the payroll and household survey being

just two of them.

     Interestingly, while the timeliness of the labor force survey makes it more

attractive to markets, the BOC staff said in a January analytical note that it

was also "the least informative for the wage common."

     --HOURLY COMPENSATION

     Hourly compensation derived from the productivity data and wage information

from the national accounts are the two other key sources, which although much

more delayed, are given a bigger weight in the wage common.

     Overall, the wage common indicated wage pressures of 2.2% year-over-year in

the fourth quarter 2017, below the historical average of 2.7%, according to the

BOC staff analysis from January.

     According to labor productivity data published March 7, however, hourly

compensation rose 1.7% in the fourth quarter 2017, the largest gain since the

second quarter 2014.

     Given the higher weight than the household and payroll surveys, that could

make the BOC's view on the assessment of the labor market slack evolve.

     Since January, the national accounts, "the most informative source,"

according to BOC staff, with the largest weight in the wage common, were also

published on March 2.

     Statistics Canada reported that household disposable income rose 1.3% in

the fourth quarter, mainly due to a 1.5% gain in employees compensation due to

higher wages and salaries, after growing 1.4% in the third quarter and 0.8% in

the second quarter.

     --POLOZ INPUT 

     With those data now in hand, BOC Governor Stephen Poloz will deliver a

speech Tuesday on "Today's Labor Market and the Future of Work" at 10:15 am ET.

     It remains to be seen whether he will update on his view on wage trends.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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