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Workers need a New Year's raise

Wages in Canada and the other advanced economies are about as flat as left-over champagne in the glass on New Year's Day. This poses a major threat to a sustained economic recovery.

During the four years from 2009 through 2013, average hourly wages adjusted for inflation rose by a grand total of just 2.3%, or by about one half of 1% per year. Real wages rose by a total of only 0.9% in Ontario and 1.1% in Quebec over those four years, though by a healthier but still unimpressive 4.8% in Alberta.

It seems that 2014 will turn out to be a year in which real wages fell. Between November 2013 and November 2014, the average hourly wage rose by a princely 36 cents, from $24.57 to $24.83 per hour.

That is an increase of 1.5%, well under the 2.0% inflation rate registered over the same period.

If one digs a bit deeper into the numbers, wages of permanent workers have risen a bit faster than those of temporary workers, and wages of women have risen a bit faster than those of men. But these differences do not hide the fact that real wages are pretty much flat across the board.

According to the most recent International Labour Organization (ILO) Global Wage Report, average real wages in the advanced economies have stagnated or fallen since the Great Recession, and indeed have fallen significantly in some countries. United States average real wages in 2013 were just above the pre-recession level, and real wages have collapsed in the most hard-hit European economies such as Greece and Spain.

The ILO notes that, across the advanced economies, wages have lagged productivity (the value produced per hour of labour) since 2000, with the result that labour's share of national income, including in Canada, has declined while the share of corporate profits has risen.

They further show that the wage difference between developing and developed countries has narrowed, especially due to rising real wages in China. Measured in terms of purchasing power, developing country wages now average about one third the level of the advanced economies.

While rising wages in developing countries are a healthy and positive development, wages in these countries likely also lag fast rising productivity, resulting in a falling wage share and high corporate profits at the global level.

Here in Canada, stagnant wages pose a threat to sustained recovery for the simple reason that household spending cannot continue to grow faster than incomes from work. Rising debt to finance consumer spending will reach a limit.

Globally, the problem is similar. Businesses are accumulating surplus savings because the world already has enough productive capacity to meet current levels of demand. Demand for most goods and services will not grow at a robust pace if wages continue to stagnate and lag behind productivity.

The ILO has published studies which suggest that an increase in real wages would give a significant needed boost to a slow-growing global economy. They also note that the problem of stagnant wages is compounded by the fact that wage increases are typically distributed very unequally. This contributes to rising debt for the middle-class and rising surplus savings for the most affluent.

While the concept of wage-led growth may be counter intuitive to many in business, it will be recalled that Henry Ford set the stage for the mass consumer economy almost one hundred years ago by giving a big boost to the wages of his own production workers so that they could afford to buy cars.

A shift to a wage-led growth strategy would, according to the ILO, include significant increases to minimum wages and more government support for unions and the process of collective bargaining.

These items are not exactly high on the policy agenda of most governments, not least that of the Harper government, but continued stagnation in 2014 may yet force some needed re-thinking.

Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University and senior policy advisor to the Broadbent Institute.

This article originally appeared in the Globe and Mail's Economy Lab

Photo: arimoore. Used under a Creative Commons BY 2.0 license.

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