Wilkins Says Tame Wages Imply Continued Slack in Canadian Economy

(Bloomberg) --

Canada's economy is producing slower wage growth than what would be expected given the overall strength of the labor market, a potential sign of continued slack, though pay gains should accelerate as the economy emerges from its slowdown, according to the Bank of Canada's No. 2 official.

Wage gains that averaged about 2.5 percent last year are still below what would be consistent with a tight labor market that would ordinarily fuel inflation pressures, Senior Deputy Governor Carolyn Wilkins said in a speech that sought to take a closer look at the issue.

“The Bank has pointed to relatively subdued wage growth as a possible sign that the job market may have more room to run,” Wilkins said.

Weakness in the oil sector is partly responsible, along with some structural factors such as underemployment in the “gig” economy, she said. At the same time, the evidence shows other sectors and regions are producing wages gains more consistent with a tighter labor market.

“Some of the weakness in wage growth can be explained by continued adjustment in energy-intensive regions to lower oil prices,” Wilkins said. “We also need to be mindful of stronger wage gains and signs of labor shortages in other parts of the economy. Monetary policy must be forward-looking.”

Wilkins reiterated the Bank of Canada's most recent outlook that weakness in the oil and housing sectors is expected to be only temporary. At a rate decision earlier this month, the Bank of Canada indicated the slump has made its push toward higher interest rates less urgent, but policy makers have also stuck to their view that further hikes will eventually be needed.

“We expect the economic expansion to pick up again after this detour, in the second quarter of 2019,” Wilkins said, “This should lead to a pick-up in wage growth as well.”

Her speech looked in depth at the puzzle of why low unemployment hasn’t produced faster wage gains. Canada's jobless rate of 5.6 percent is at the lower end of the central bank's estimated range of the country's natural unemployment rate of between 5.5 percent and 6.5 percent, Wilkins said.

“By many measures, the labor market in Canada is in good shape,” she said.

Still, that measure of trend unemployment is highly uncertain, meaning the Bank of Canada should also be looking at other data such as wages for indications of slack.

An economy with a tight labor market should be able to produce wage growth of around 3 percent, according to Wilkins. She found an important factor for the sluggishness was lagging pay in oil producing regions. There are also some other sectoral changes going on in the economy such as fast growth in service- sector jobs.

But those don't fully explain the phenomenon.

“Even after accounting for these regional and sectoral factors, wage growth overall is still a bit short of what one would expect at this stage,” she said.

She outlined a list of other potential factors that included: skills mismatches, caution among workers to change jobs, reluctance to move, expensive housing in some markets, and global structural factors such as technological disruption and growing market concentration.

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