Inflation, Productivity and Real Wage Stagnation: Canada 1960 to 2023

 

Today’s CPI inflation numbers have many breathing a sigh of relief with the expectation that with inflation below 2 percent, more interest rate relief is on the way and Canadians can resume their high personal borrowing lifestyle.   Lost in the short-term euphoria and celebration of expected lower borrowing costs is the long term cost that inflation has had on our standard of living given the low productivity gains of the last five decades.  Nowhere is this more evident than when one takes a look at how real wages have performed over time.

 

Figure 1 plots the average annual monthly hourly Canadian manufacturing wage – nominal and real – for the period from 1960 to 2023.  The nominal hourly manufacturing wage data and the All-City CPI data are both from the US Federal Reserve of St. Louis data sets [CPALCY01CAA661N; LCEAMN01CAM189S] with the real hourly wage data in $2015.   Why manufacturing wages?  Well, the manufacturing sector has generally been held up as the beacon for good quality and high paying jobs with a lot of hand wringing as manufacturing jobs have declined as a share of employment.  It sounds old fashioned but many still regard manufacturing jobs as the “high ground” of an economy in terms of value added to which I would also add the resource sector (including agriculture).

 

 

 

When nominal hourly wages are examined, their performance looks impressive.  The monthly nominal manufacturing wage in Canada in 1960 averaged $1.78/hr. By 2023, it was $30.66/hr and the average annual growth rate of real nominal hourly wages in manufacturing was 4.7 percent.  However, when adjusted for inflation using the All-City CPI for Canada with 2015 as the base year, real nominal wages barely double over the period going from $13.64/hr to $24.91/hr.  The average annual growth rate of real hourly manufacturing wages over this entire period was only 1 percent annually.  Given that at 1 percent annual growth it would take approximately 72 years for a quantity to double, we can expect real hourly wages in manufacturing to be double those in 1960 by 2032.

 

 

 

Figure 2 plots the annual average growth rate of real hourly manufacturing wages and adds a 5^th order polynomial smoothing plot.  When one examines both Figure 1 and 2, it becomes apparent that the stagnation in real wage growth really sets in during the 1970s.  There was a brief uptick in real wage growth in the wake of the FTA and NAFTA (in 1988 and 1994 respectively) but decline sets in again after the 2008-09 financial crisis.  When one combines the productivity decline that starts in the 1970s following the first oil price shock with the effects of inflation, the erosion of the standard of living – as captured by real wages – is dramatically illustrated.  It makes the case for why bringing inflation under control is so important and also why we need a productivity agenda to drive Canadian policy going into the next election.

Canada's Life Expectancy at Birth in Decline

 

Standards of living are marked by a number of indicators most upfront of which are economic measures such as per capita GDP or per capita wealth.  However, other indicators of the standard and quality of life include basic health indicator and life expectancy at birth has long been a marker of the average “quantity of life” a country provides.   Yet after the increases of the twentieth century and 21^st centuries which saw average life expectancy in the world rise from 32 years in 1900 to 71 in 2021, much of the world has seen a decline in recent years in the wake of the COVID-19 pandemic.   Statistics Canada has already noted that for three years in a row, life expectancy at birth for Canadians has declined from 2019 to 2022 with this decline being driven by an increase in unexpected deaths (such as substance related deaths, suicides and homicides) as well as the impact of COVID.

 

However, what is more interesting in the Canadian case is just as real per capita GDP growth slowed after 2010, so did the growth in life expectancy at birth which highlights the connection between economic growth and performance and ultimately health indicators such as life expectancy.  The accompanying figure plots life expectancy at birth for Canada and Ontario at assorted overlapping three-year intervals since 2005 and they show that life expectancy at birth grew from 2005/07 to 2011/13 from 80.51 years to 81.73 years for Canada and 80.86 years to 82.19 years for Ontario.  Growth then slowed and life expectancy at birth peaked at 81.94 years from 2015 to 2018 for Canada and 82.41 years for Ontario.  Since then, both have declined hitting 81.55 years for Canada and 81.97 for Ontario by 2020-22.

 

 

 

While much of the decline definitely coincides with the pandemic, life expectancy was essentially flat from approximately 2011/13 to 2017/19 when the decline begins but then accelerates during the 2019/2021 window as the pandemic strikes.  So, the takeaways I get from this is that the pandemic indeed is associated with a decline in life expectancy at birth, but growth had already plateaued and begun to slip well before this in the wake of the 2008/09 recession and the slower economic growth and performance since.  The pandemic appears to have strained or augmented whatever forces were already in play prior to 2020. 

 

Of course, one might ask if this has also occurred in other countries.  For example, a quick glance shows life expectancy at birth in Japan rising from 2012 until 2020 before a decline set in going from 83.1 years to peak at 84.56 in 2020 before declining to 84 by 2022.  From 2012 to the pandemic start in 2020, life expectancy at birth grew 1.8 percent in Japan but only 0.2 percent in Canada.  Germany, on the other hand from 2012 to 2020 grew by 0.6 percent (from 80.54 to 81.04) years.  The United States on the other hand saw life expectancy essentially flat since 2012 (growing just under 0.1 percent) to the pandemic with a decline during the pandemic.  These trends are food for thought indeed. 

What is a Provincial Government to Do?

 

Ontario is coming up to Budget Day next week on March 26^th and it will be interesting to see what the provincial government does on a number of issues because quite frankly the provincial government is in a bit of a pickle when it comes to economic and fiscal policy.  Over the last decade, Ontario has been hit by a productivity decline that has translated into slower economic growth.  Since the pandemic, this has been combined with a bout of inflation and a surge in population growth.  When you start looking at Ontario fiscal and economic indicators in real per capita terms, there are going forward disturbing implications for our standard of living.

 

If one compares the 2023-24 fiscal year forecast from the Fall Economic Update with the 2018-19 fiscal year, total provincial government revenues and expenditures are up approximately 30 percent respectively.  Health expenditure is up 33 percent.  The size of the provincial economy is up 22 percent.  On the surface, this is seemingly good news in the wake of the pandemic.  The problem is that over the same period, population in Ontario has grown by an estimated 12 percent while prices have risen nearly 19 percent.  Put another way, the combination of population and inflation at nearly 30 percent has outstripped nominal GDP growth while essentially matching the growth of government revenues and expenditures and in particular health spending.

 

The best way to visually illustrate these effects is to create an index.  Figure 1 uses data from Statistics Canada, the Fiscal Reference Tables and the 2023 Ontario Fall Economic Outlook and Fiscal Review to create real per person indices of economic and fiscal performance setting 2013/14 as 100.  Figure 1 plots real per capita (deflated using the CPI-All Items Index) Ontario provincial government Own Source Revenue, Federal Transfers, Total Revenue, Program Expenditure, Debt Service Costs and Total Expenditures.  Note that 2023-24 is an estimate.

 

 

 

In real per capita terms, debt service costs have been a bright spot in that despite the continuing rise in both the provincial net debt and interest rates, inflation and population growth have served to reduce the real per capita burden of servicing Ontario’s debt.  Indeed, the drop-in debt service has probably been able to free up resources for program spending. On the other hand, compared to 2018/19, real per capita revenues and expenditures are now below where they were.  In other words, provincial government revenue and spending have not kept up with inflation and more importantly population growth.

 

 

 

Figure 2 illustrates the decline in the Ontario way of life a bit more succinctly.  Does the health care system feel strained?  Real per capita provincial government health care spending after the surge of the pandemic is back to where it was in 2018/19.  Indeed, it has not changed much since 2013/14.  During that time, one imagines that labor costs for health care have gone up pretty dramatically which means there are indeed fewer doctors and nurses available to service a growing population. And to top it all off, real per capita output in Ontario has not kept pace with either inflation or population growth.  While real per capita GDP in Ontario grew somewhat from 2013/14 to the pandemic, it has since declined.

 

Looking at Figure 2, if the average Ontario had to ask themselves am I better off than a decade ago when it comes to my real per capita income and health spending, the answer is one that should concern the provincial government.

Ontario Economic Decline is Real and Substantial

 This post originally appeared in the Fraser Institute Blog.

A spectre is stalking Ontario, and it’s the spectre of decline. For most of post-war Canadian economic history, Ontario has had a per-capita real GDP substantially above the Canadian average. At the same time, Ontario has had real per-capita GDP growth relatively close to the Canadian average.

This dominance was rooted in Ontario’s role as Canada’s industrial heartland that developed in the wake of Confederation. Ontario was indeed a beneficiary of Canada’s national economic development policies based on development of the Canadian prairie wheat economy, a tariff wall to protect domestic manufacturing and an east-west railway transport corridor. At the same time, Ontario’s economy was also marked by prosperity driven by market-based economic development best described in the words of economic historian Ian Drummond as “progress without planning.”

Ontario’s performance can be summarized in two charts using data from the Macro-data Base of Finances of the Nation. The first chart below plots real per-capita GDP separately for Ontario versus the rest of the country (Canada without Ontario) from 1990 to 2022.

 

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The second chart plots the average annual growth rate for Ontario, the rest of the country and all of Canada for the 1990 to 2022 period and the approximately 30-year period preceding it. The evidence suggests that during the 1990s, Ontario fell dramatically below the rest of the country in terms of its real per-capita GDP growth. In 2006, the rest of the country surpassed Ontario’s real per-capita GDP and remained higher for a decade before converging from about 2015 to the pandemic era. However, in the immediate post-pandemic era, Ontario has once again fallen behind the rest of the country.

 

 

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During the 30-year period prior to 1990, Ontario’s real GDP per-capita growth was quite close to the overall Canadian average and that of Canada without Ontario. What’s remarkable is what’s happened since.

Ontario’s average annual growth rate of real per-capita GDP fell from 2.6 per cent to 0.6 per cent. To be fair, a productivity decline has also marked the rest of the country. Indeed, Ontario and the rest of Canada appear locked as partners in a long-term productivity and growth decline, but Ontario’s performance is both dire and unique. The rest of Canada since 1990 saw its per-capita income growth rate cut in half. While hardly a sterling performance, compared to Ontario it was a veritable boom given that Ontario’s post-1990 average annual growth rate was barely one-quarter that of its 1960 to 1990 growth rate. One can argue that Ontario is dragging down the overall Canadian growth rate.

One can construct all kinds of palatable and soothing stories to explain why this has happened and why it’s not as unflattering as these statistics suggest. For example, one can argue that convergence of income is a good thing as it provides for a more economically balanced federation and is a logical outcome of economic development spreading across the country. At the same time, convergence could also mean that once per-capita incomes have equalized, growth rates should be similar, too, which is not the case here.

One could argue that Ontario was exceptionally hard hit by the economic adjustment its manufacturing base underwent during the 1990s in the wake of the 1998 Canada-U.S. Free Trade agreement and then NAFTA. Yet most of that adjustment was done in the 1990s and a breakdown of growth rates in the 1990 to 2022 period shows 1990 to 2000 had higher per-capita income growth than afterwards. One could also argue that the real per-capita slowdown is an illusion fuelled by rapid population growth. This of course ignores the reality that Ontario’s population has been growing about the same as the rest of the country and its share of total Canadian population today remains pretty much the same as 30 years ago.

Another potential argument is that the relatively better performance of the rest of the country is the result of natural resources with Alberta, Saskatchewan and Newfoundland and Labrador doing much of the heavy lifting. Yet this ignores that Ontario, and especially its north, is resource rich with abundant minerals and hydropower resources. Yet Ontario has been planning for more than two decades to access its Ring of Fire and little yet emerged. If the early 20th century could be characterized as “Progress without planning” then the early 21st may as well be “Planning without progress.”

Finally, one could argue it’s all just a rough patch for Ontario and that things are about to turn around. At the 1960 to 1990 growth rate, Ontario’s per-capita income would double in about 30 years. At the post-1990 average annual growth rate, the next doubling will take more than a century.

These are all ultimately unconvincing stories strung together to provide a comforting and bearable account as to why we shouldn’t worry and indeed shouldn’t do anything at all. Yet the first step to a solution is acknowledging a problem exists. Unfortunately, Ontario seems serene in the confidence it does not have to worry. Ontario needs to wake up and realize it has a problem.

 

Ontario Housing Prices Coming Down

The pandemic era in Canada saw a thirty percent increase in housing prices that were already high as a result of a decade of low interest rates and rising demand due to population growth.  However, a combination of rising interest rates led by the Bank of Canada in an effort to curb inflation, the inevitable subsequent slowdown in the economy, as well as inflation reducing the household resources available for home purchases has meant that home prices in Canada have finally reached their peak and are on the way down.  The latest Teranet-National Bank Housing Price Index Release shows that the National Composite House Price Index fell 3.1% from August to September, the largest monthly decline on record since the index began in 1999 and exceeded the previous month’s record decline of 2.4%. Needless to say, Ontario did not escape this trend but despite the drop, prices are still higher than they were a year ago.

 

 Figure 1 shows that year over year (September to September), prices were up in 15 out of 16 major Ontario cities with the exception being Peterborough.  The largest percentage increases year over year have been in Greater Sudbury, Kingston and Kitchener-Cambridge-Waterloo.  Thunder Bay's increase over the last twelve months was just under 4 percent.  However, prices are down from their peak in all of these cities as illustrated in Figure 2.  Most of these cities saw their prices peak in May of 2022 with the exceptions being Belleville, Kitchener-Cambridge-Waterloo and London  (peak in April 2022), Ottawa-Gatineau (peak in June 2022) and Thunder Bay (peak in July 2022).  

 

 

The largest declines since peak price have been in Windsor (16.2 percent), Oshawa (16.4 percent) and Peterborough (23.2 percent).  Meanwhile, the smallest declines since peak price were in Thunder Bay (5.7 percent), Greater Sudbury (6.1 percent) and Ottawa-Gatineau (8 percent).  Northern Ontario cities like Thunder Bay and sudbiury are not immune from national or provincial trends but they have historically not been as subject to the same fluctuations as other cities.  In Thunder Bay for example , the housing price boom while substantial relative to its historic prices was nevertheless more muted than the GTA.  The downturn will likely be similar.  It is probably no coincidence that to date the price drop in Thunder Bay, Sudbury and Ottawa-Gatineau has been the least of these 16 major cities as all three of these cities have an economic base of broader public sector employment at 30 percent of jobs or more (in the case of Ottawa- Gatineau) which provides a substantial economic stabilizer when the national average in closer to 20 percent.

Given that interest rates are expected to rise substantially next week as  inflation really shows no signs of abating in Statistics Canada's latest release, one should see the price decline continue into the fall.

The Incredible Shrinking Newspaper and the Decline of the Forest Sector

Going through some old stuff, I came across a full newspaper from 1981 – a copy of the Tuesday June 30^th edition of the Thunder Bay Chronicle-Journal.  Examining it, one is struck by how hefty the paper was in terms of both paper volume as well as article content compared to what is currently being published.  Indeed, I put this old copy of the Chronicle-Journal on my dining room table alongside the Monday February 11^th, 2019 edition for a comparison (see the photo) and the differences are quite striking.

Newspapers have indeed shrunk.  The 1981 version of the Chronicle-Journal was 15 5/8 inches (39.7 cm) wide and 22 5/8 inches (57.5 cm) long while the 2019 version is 11 ½ inches (29.2 cm) wide and 22 5/8 inches (57.5 cm) long.  More important is the thickness.  The 1981 newspaper consists of two section – each 32 pages long while the 2019 version is in two sections – each 10 pages long.  The long and short of it is that the amount of newsprint required has shrunk by over two-thirds.  Even more interesting is the fact that until the mid 1990s, Thunder Bay actually had two papers published – a morning edition which was the Chronicle-Journal and an evening edition known as the Times-News.

When what looks at what has happened to the Canadian forest sector over the last fifteen years, one only needs to take what has happened at our own local paper and extrapolate it across North America.  Newspapers have been either shrinking in size or simply going out of print completely.  There was certainly a lot more advertising in the pages of the 1981 version of the Chronicle-Journal and competition from electronic media and the internet have been important factors in the decline in the demand for newspapers.

Along with changing consumer preferences when it comes to news sources, there have been other shocks to the pulp and paper industry.  The recession of 2008-09, international newsprint and pulp competition from lower cost suppliers, a high Canadian dollar, aging capital stock and high electricity prices were all factors which helped decimate the Northwestern Ontario pulp and paper industry in the first decade of the 21^st century.  Across Canada, employment in logging, pulp and paper and wood dropped by over 40 percent between 2004 and 2014 while the number of paper mills fell from 50 to 30 – also a 40 percent decline.

It is really quite remarkable that newspapers have been able to survive at all given the size of the demand and technology shocks hitting them over the last thirty years.  I must admit, that while I have adjusted to the era of e-papers, I do occasionally miss having a more hefty newspaper in hand.

The North and Ontario's Population

Well, today is election day and as we pause and wait for the results later today, why not take another look at northern Ontario's population but this time with numbers from the 2017 BMA Municipal Study.  Two items for your consideration. First, a table showing population in the major northern Ontario municipalities as well as the growth rates of their population for the period 2006 to 2011 and 2011 to 2016.  The table ranks the cities from the highest to lowest growth rates for the period 2011 to 2016 and they show that at the top are Parry Sound and Greater Sudbury.  Their populations have continued to expand and while their proximity to the GTA and its opportunities may be a factor it remains that proximity has not helped North Bay.  Also of interest is Elliot Lake which has taken to marketing itself as a retirement community.  Despite an aging population, people are not retiring to Elliot Lake in droves.



With the north not really growing while Ontario's population rises, its share of Ontario's population is also declining.  However, in this case it turns out that the North has plenty of company when it comes to shrinking population shares.  The figure below - also taken from the 2017 BMA Municipal Study (using data from the Ontario Finance Ministry) plots the population share of each of Ontario's regions since 1991 and projected to 2041.  It turns out that each region is expected to decline as a share of Ontario's population by 2041 with the exception of the GTA.  The GTA is projected to rise from 42% in 1991 to hit 53% by 2041.  As for northern Ontario - it is going from 8 percent of the population in 1991 to 4 percent by 2041.  At present it is about 7 percent.


Two things.  First, Ontario is becoming increasingly lopsided in terms of population and employment with the GTA enjoying a perpetual boom and the rest of the province with perhaps the exception of the Ottawa area undergoing a slow stagnation.   This will be a major challenge for the next government when it comes to dealing with the provincial economy.  Second, as many of you are aware, there was an increase in riding numbers for today's elections - there are now 124 seats in the legislature up for grabs.  Of those, 13 are in northern Ontario which means that 10 percent of the election ridings are in the north but only about 7 percent of the population.  Whatever northerners may think about their relative alienation and neglect by the south, it remains that their votes yield clout out of proportion to their population numbers.  Northern Ontario needs to make use of this influence while it still retains it. It is unlikely that 2041 will see the north with 10 percent of the seats in the legislature but only 4 percent of the population.

The State of the North

The State of the North conference hosted by the Northern Policy Institute was held in Timmins from September 27-28 with much of the discussion focusing on reversing the north's economic decline.   Charles Cirtwill, President of the Northern Policy Institute sent out the slides of his presentation with an invitation to share and today's post reproduces a few of those slides.  Figures 1-2 present some GDP estimates by sector for the Northwest and the Northeast of Ontario while Figures 3-5 present non-residential building permits for assorted northern Ontario districts.

The Decline of Saving

Most of us are aware that Canadian households have reached record levels of indebtedness over the last few years.  Household debt in Canada is now over $2 trillion and household debt to disposable income ratios in Canada are now at 170 percent.  Less discussed is what has happened to savings.  While low interest rates have been a factor in Canadians being able to carry substantially larger debt burdens, they have also been a factor in reducing the interest income from saving and as a result have led to a drop in the number of savers.

The Bank of Canada rate dropped from 6 percent in 2000 to 0.75 percent in 2015.  Over the same period, the total number of savers in Canada as reported by Statistics Canada from data compiled from Income Tax returns (Table 1110036 - Canadian savers, by savers characteristics, annually) dropped from 4,808,930 to 3,356,840 – a decline of 30 percent.  Over the same period, the median annual interest income of Canadians fell from $400 to $230, a drop of 43 percent.

Why the North's Cities are Losing Population

Everyone is still pretty much digesting last week's census results and the news that many northern Ontario's cities actually lost population.  Of course, the immediate gut reaction to the population decline of what are supposed to be the regional magnets for growth will focus on a slow economy as well as cries that the provincial government needs to do something.  I think its important to think more carefully about what actually is happening given that northern Ontario as a whole actually saw a slight population increase.  Here is my take on what some of the factors may be.