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.

Harris or Trump? For Canada, Post November 4th Is Going to Be a Challenge

 

As we move into the final sprint of the US election, it bears as always to pay attention to the economic implications for Canada.  Whatever one’s political priors or favorites may be in this election, in the end it needs to be realized that when it comes to US trade and economic interests, it does not matter whether Trump or Harris wins– American interests trump (no pun intended) Canadian ones.  And in the case of the economy and our trade relationship with the United States, be prepared for some tough bargaining.  While 2024 marked the 30^th Anniversary of NAFTA, it has since 2020 been replaced by the USMCA or CUSMA agreement with renewal talks beginning in 2026. 

 

Along with perennial sticking points like milk and dairy or softwood lumber, in the United States, despite what economists and evidence might say about economic growth and the benefits of trade in the wake of NAFTA and CUSMA, the debate will be shaped by the widespread belief that NAFTA in particular resulted in job losses and wage stagnation.   In the case of manufacturing, the accompanying graphic summarizes quite nicely why the Americans are going to be playing hardball.  In many respects, US manufacturing job losses did coincide with NAFTA. 

 

Figure 1 presents annual Canadian and American manufacturing employment from 1976 to 2023 using a dual scale since US employment and population in general is about ten times ours.  In 1994, there were nearly 19 million Americans employed in manufacturing and 1.8 million in Canada. In the decade afterwards, by 2005, US manufacturing employment fell to 16.2 million while Canadian manufacturing grew to 2.2 million.  In the wake of NAFTA, American manufacturing employment fell by 14 percent while Canadian manufacturing employment rose by 20 percent. 

 

 

 

 Since 2005, American manufacturing employment has declined slightly to 15.6 million while Canada’s declined to about 1.8 million where it has stabilized somewhat.  In other words, over thirty years, Canada has stayed flat in terms of total manufacturing employment (notwithstanding the rise and fall from 1994 to about 2010) while the US has seen a decline.  The good news is that since about 2019, as evidenced by the 5^th order polynomial smoothing line, both countries have seen a slight increase in manufacturing employment as a result of fallout from the pandemic, trade issues with China and the rise of onshoring production activities.

 

Yet those same polynomial smooths show a pretty consistent decline for the US since 1976 with Canada doing somewhat better.  True, Canada is not to blame for the decline in US manufacturing.  Both countries have seen a decline in manufacturing employment over time both in absolute numbers as well as a share of total employment.  It is not 1960 anymore.  There have been productivity issues in both countries as well as intense competition starting in the 1990s from China and other Asian economies as well as Mexico which is/was a part of CUSMA/NAFTA.  However, that does not matter.  For the United States, creating jobs in manufacturing will mean looking at all the players – including Canada.  It will not matter whether Harris or trump becomes President in this regard.  Notice has been served.

The Importance of Manufacturing in the Age of COVID-19

 

Ontario’s economy has been hit hard by the Covid-19 pandemic.  Seasonally adjusted monthly employment in Ontario between February 2020 and September 2020 fell 6.3 percent - from 7,551,900 jobs to 7,077,600 jobs.  However, as illustrated in my last post, the employment drop varied across its CMAs.  The worst hit CMAs are Kitchener-Waterloo-Cambridge and Thunder Bay - which saw declines of 11.2 and 9.2 percent respectively while at the other end are Guelph and Brantford, which despite early losses have now recovered and in the case of Guelph even seen a small increase.  The question of course is what might account for this variable performance?

One’s first thought is that it is the result of the impact of Covid-19 with cities harder hit by the virus getting a bigger employment wallop.  However, a plot of the percent change in employment levels across Ontario’s 15 largest CMAs from February 2020 to September 2020 (Figure 1) against Covid-19 cases per million population as of mid-October show only a slight relationship between more negative employment growth and higher case counts.  

 

 

 

 

 

 

 

 

 

 Can the effect of Covid-19 on employment depend on a community’s employment structure?  For example, are communities more dependent on occupations in health, social services, education and public administration  (HSEP)– which are mainly broader public sector jobs – more insulated from employment effects of Covid-19?  Figure 2 illustrates this relationship for Ontario’s 15 largest CMAs and again there really is not much of a relationship.  Indeed, outside of Ottawa, Kingston and Thunder Bay have the largest HSEP shares in Ontario at 42 and 37 percent respectively and they are not exactly coasting. And, if one looks at the share of employment in food and accommodation services (not shown) it is also a pretty flat curve.  Indeed, the employment drop across CMAs seems to be impervious to being more service intensive as well as the specific effects of Covid-19. 

 

 

However, there is one more figure that is worth considering. Figure 3 plots the percent of employment in manufacturing against the percentage change in employment. What is interesting here is that the relationship is a positively sloping one – that is, on average, larger employment shares in manufacturing seem to be associated with a smaller employment drop over the February to September period.  It is of course by no means an ironclad relationship.  Kitchener-Cambridge-Waterloo, for example has a manufacturing employment share of 17 percent but nevertheless experienced the largest employment drop of the 15 CMAs at 11 percent. 

 

However, the four CMAs with the largest manufacturing employment share are Windsor (23%), Brantford (19%), Guelph (19%) and Kitchener-Cambridge-Waterloo (17%).  They average 19.4 percent in manufacturing as a share of employment and their average employment drop was 4.5 percent.  Meanwhile, the four cities with the lowest manufacturing employment share are Thunder Bay (6%), Kingston (5%), Sudbury (3%), and Ottawa (2%). They averaged a manufacturing employment share at approximately 4 percent, but an average drop in employment of 7 percent.  What is it about manufacturing that may insulate your economy more from Covid-19 related employment drops over the longer term?

Good question. Obviously, it is easier to shut down things are deemed non-essential such as personal services and perhaps even some broader public sector service activities.  Moreover, some of these sectors are relatively low-paying and the fairly generous CERB payments probably more attractive than returning to work.  These are very labour-intensive activities and when hit hard can generate a lot of employment losses.  On the other hand, manufacturing – especially advanced manufacturing – is already quite capital intensive so it is relatively more difficult to shed employment.  Moreover, once the economy reopened – it was things that were needed be they masks or toilet paper or metal products – and production resumed as quickly as possible. And, manufacturing is much higher paying making staying on the CERB less attractive.

 

The relative robustness of employment in the Covid-19 era as a result of manufacturing intensiveness may have global implications for economic recovery.  Economies around the world have been hit hard with large drops in GDP and employment. However, many countries over the last few decades have seen an evolution of their economies away from goods production and towards services.  The G-7 countries certainly are in this category.  This means countries that are currently more manufacturing intensive will likely do much better in the short to medium term especially if they are producing goods in high demand.

 

This also explains China’s seemingly robust economic recovery.  Given that so much of the world’s manufacturing has relocated to China over the last two decades, they are poised to dominate economic recovery over the next couple of years.  China’s success however may be fragile. First, their longer-term export success requires that other economies recover.  Being a mercantilist means you want to expand your national economy and power by exporting high value-added products and importing low value-added items.  However, having your export markets devastated by Covid-19 is going to be bad for business. Second, most other countries are about to embark on a manufacturing repatriation program as they realize that having a mercantilist and authoritarian country with a monopoly on goods production does place your supply chain at risk and ultimately your national economic welfare.