Canada’s unemployment rate is at its lowest level in more than 40 years. And yet — wage growth has been stubbornly sluggish. But paycheques could be getting bigger in 2019, according to Royal Bank (RY).
In its latest jobs report, Statistics Canada reported lacklustre wage growth of 2 per cent year-over-year. That barely keeps up with the rate of inflation.
“One of the explanations for disappointing wage growth in recent years is that job ‘churn’ — workers changing jobs — has been low,” says Nathan Janzen, senior economist at RBC, in a research note.
“Those moves are typically thought to be a key driver of wage growth, as opposed to getting a pay raise in a current job.”
Janzer says one explanation is demographics. Canada has an aging population with a large chunk approaching retirement, many of which are less likely to risk switching jobs.
According to recent data from Statistics Canada, younger workers are more eager to switch jobs because they are dissatisfied with their current positions.
“That proxy for voluntary job churn has been edging higher, and for 25-54 year-olds the rate was close to pre-recession levels in 2018,” says Janzer.
“And those who changed jobs appeared to be getting higher wages.”
As older workers leave the job market, their impact on wage growth will shrink and the overall number will have room to run.
Minimum-wage increases will help wage growth, but Janzer says they weren’t necessary.
“Given tight labour markets, wages would likely have increased anyway, with workers ostensibly in a much stronger bargaining position,” says Janzer.
Janzer says the wage-growth picture in oil-producing regions like Alberta isn’t as rosy.
“Albertans can find some solace in the fact that, after outperforming on wage growth for several years, their province still had the highest average hourly wage rate among the provinces last year,” says Janzer.
“But the provincial unemployment rate remained above the national average at 6.4 per cent in December.”
“However, labour markets already look very tight and wages tend to lag the economic cycle,” says Janzer.
“So even the pace of growth we expect—GDP increasing slightly less than 2% annually—should be enough to prompt some further acceleration in wage growth.”
Janzer says there are risks to the broad economy, but expects higher wages to offset the impact of higher interest rates eating into household purchasing power.