What Happened to (Real) Wage Growth?

The Canadian economy saw improvements in 2016, in comparison to 2015, growing at 1.4%, but well behind its 2.6% average growth in 2013-2014. In 2017, economic growth exploded to 3%, only to slow down in 2018 to 2%. During this period, the unemployment rate declined from 7.2% in January of 2016 to 5.6% in December of 2018 – the lowest unemployment rate Canadian workers have seen since the late '70s. With the economy performing at full capacity, and the labour market in a state of virtual full employment, the Bank of Canada has increased the overnight interest rate five times since January 2016, hoping to maintain inflation expectations within the target range of 1-to-3%. While the Bank of Canada has cited the increased debt load that Canadians are carrying as well as snail’s-paced wage growth as causes for concern, it has continued to hike up interest rates so it has room to manoeuvre and ‘hike down’ when the next economic downturn emerges. Although the necessity of continuing to hike interest rates is questionable, given the concerns cited by the Bank of Canada and mild inflation, one thing is certain: increasing interest rates risk slowing down economic growth, and with it, eliminating the existence of tight labour markets, conditions in which workers’ bargaining power is generally in a more favourable position. 

What happened to my wages?

While the unemployment rate has declined to rates unseen since the late ‘70s, workers’ real wages have largely remained stagnant during this period.

Figure I: Non-Management Nominal Wage Growth, 2016-2018

figure1

In standard economics approaches, a tightening labour market and a subsequent scarcity of jobs generally translates into workers’ wages being bid up by employers. As employers race to find workers from a shrinking supply, they try to outbid other employers as a means to secure workers' services. In other words, tightening labour markets are generally conducive to workers’ bargaining power, as workers have plenty of options to sell their capacity to work. For workers, tight labour markets mean it’s a sellers’ market. Figure I, above, broadly captures this trend. From January 2016 to December 2018, the unemployment rate declined 7.2% to 5.6%. During this time, non-management workers’ nominal wages―the money price of their wages―increased by 5.6%. Most of the wage growth that workers experienced occurred in late 2017 to early 2018. It would appear that workers largely benefited and saw their living standards increase in the previous three years. During the same period, however, workers’ real wages – wages adjusted for inflation, i.e., purchasing power have stagnated. [See Figure II, below] While, since January 2016, nominal wages for non-management workers (80% of the population) have grown 5.6%, real wages have grown by less than 0.5% (0.37%). Real wage growth for workers in traditional industries was particularly bad; blue collar workers[1] saw their wages decline by half a percent, while workers in manufacturing saw their real wages decline by 1.26%.

Although workers as a whole have seen their wages stagnate – and decline in some cases – in the past few years, some workers have seen their real wages increase. Those in the bottom 20%[2], most of whom either directly or indirectly benefited from some type of minimum wage increase across a number of provincial jurisdictions, saw their real wages increase by 3.54%, while the bottom 40%[3] saw real wage increases of 1.57%. Non-management workers employed in sales and service occupations, a group which benefited directly and indirectly from minimum wage increases, saw an increase of nearly 4% in real wages.

In global terms, workers continue to make essentially the same amount of money – in purchasing power terms – in 2019 as they did in January 2016. While those at the bottom end of the labour market saw their real wages increase, this was arguably due more to political intervention in the form of legislated minimum wage hikes and its spillover effects than to the natural workings of the forces of supply and demand of the market.   

During the same period, management, which composes approximately 9% of the population, saw their nominal wages grow by 10.2% and their real wages increase by 4.7%. Senior managers (CEOs, CFOs, VPs etc.), who compose 0.29% of the employed population, have seen their nominal wages grow by 17.6% and their real wages grow by 11.64%. While the vast majority saw their wages stagnate, those in the top 10% and 1% saw their purchasing power increase.

figure2

Why has this been the case? Why has workers’ purchasing power stagnated in the face of an expanding economy and tightening labour market—a condition which is generally conducive for workers’ real wages to grow? The business press, bank economists and even the Bank of Canada can’t seem to understand why. What was once a relationship that was largely taken for granted (tight labour markets=higher real wages), has been so weak, even flat, in the most recent business cycle(s).

Workers and those in the labour movement can help them understand. While it seems obvious to many in the trade union movement, it is less so to the economic elites and their policy wonks in government. Workers’ wages continue to stagnate, because for 40 years, workers’ organized bargaining power has been attacked from all sides. In industrial relations, legislative changes have made it more difficult for workers to organize into unions and engage in collective bargaining; employers themselves have become progressively anti-union, often using dirty and illegal methods to ward off unionization, or worse, moving to low-wage jurisdictions to manufacture goods. In trade policy, our governments, at the behest of the economic elite, have sought to sign trade agreements which place our workers in direct competition with low-wage workers, in addition to permitting an influx of cheap imports from countries with dubious labour standards. In economic policy, government after government has sought to cut and eliminate social services, scale back labour market supports (like E.I.) and chase balanced budgets no matter what the cost and who it affects. In monetary policy, central banks have focused solely on controlling inflation instead of encouraging employment growth, as they are mandated to do, in order to satisfy financial markets and interests. The result? A progressive decline in union density, particularly in the private sector. In one sentence, policies and actions enacted on the shop floor, in society and in government, by employers and Liberal and Conservative governments, have sought to destroy workers’ bargaining power, and in particular, organized bargaining power—the organized capacity of workers to compel employers to pay more than what the ‘market’ (i.e., employers) allocates.

That, and only that, is the reason why workers’ real wages continue to stagnate despite economic growth. Without organized bargaining power, without a strong workers’ movement and a capacity to periodically bargain over the price of their labour-power, workers’ ability to increase their real wages, and thus improve their living standards above what the market provides, will fail and wages will continue to stagnate.

It is obvious that if workers’ living standards are to increase, their purchasing power must also increase. In other words, their money wages have to rise faster than inflation. If enough workers can organize strong unions, they can force employers to share some of their profits without driving up inflation too much. Faced with strong unions pushing for higher wages on the one hand, and competitors keen to take away market share by keeping lower prices on the other, employers will not pass on the full cost (or any) of increases to prices, and instead (made to, through organized bargaining power!) "share" their profits with workers. In this way, unions not only help in increasing real wages for workers but can control product markups and redistribute income away from profits to wages.

The most recent business cycle and the weak relationship between tightening labour markets and (real) wage growth should lay to rest the belief and faith that the interactions between supply and demand are sufficient to increase workers’ living standards. This faith is misplaced because there is nothing "natural" about the market. What we call the market, particularly the relationship between workers and management, is not just a simple “exchange” relationship, like buying an apple from a store. It is a relationship infused by power and characterized by conflict. Employers want to pay the least possible; for workers, this means poorer living standards. Workers, on the other hand, want to earn as much as possible; this means (potentially) less profit for owners. In a situation such as this, characterized by opposing interests, conflict is the name of the game, and force decides. While tight labour markets are fundamental and beneficial to workers’ bargaining power, they are simply insufficient in their ability to provide workers with increasing real wages. Only organized bargaining power – in the form of unions – can do this.


 [KL1]In a particular industry OR In particular industries 

Figure II: Nominal versus Real Wage Growth, 2016-2018


[1] Non-management workers employed in the trades, natural resources, manufacturing and utilities.

[2] NOC 5-7

[3] NOC 4-7


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