Economic and Social Reports
Real wages and productivity during the COVID-19 pandemic

Release date: October 27, 2022

DOI: https://doi.org/10.25318/36280001202201000002-eng

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Abstract

Rising wages and prices have characterized the pandemic in 2021 and 2022. Soaring unit labour costs have raised competitiveness concerns. This article contributes to the discussion by examining how real wages in the business sector have evolved over the pandemic and whether their movements have been consistent with those of labour productivity. It is found that the real wage (total compensation per hour worked deflated by the gross domestic product deflator) in the second quarter of 2022 was 7.1% lower than in the first quarter of 2019. In contrast, labour productivity declined by only 0.3% over the same period. While the gap that has opened since the beginning of the pandemic is precedented, it is close to the limit of its historical range. In addition, real wages calculated by deflating total compensation per hour worked by the consumer price index have risen by 3.6% over the same time period. The difference in the real wages suggests that the price of the goods and services produced by workers has risen compared with the price of goods and services being consumed by workers. The increase in the relative price can be traced to stronger growth in the price of gross fixed capital formation (particularly residential and non-residential structures) and the price of exports compared with the price of final consumption expenditure. 

Authors

Danny Leung and Ryan Macdonald are with the Economic Analysis Division at Statistics Canada.

Introduction

The year-over-year increase in consumer price inflation reached 8.1% in June 2022, its highest level since January 1983.Note Indeed, much of 2021 and 2022 so far have been marked by rising inflation. The sources of this inflation include global supply challenges and strong demand as the economy recovers from the COVID-19 pandemic.Note

There is evidence to suggest that Canadian firms expect to continue raising prices and wages. Results from the Canadian Survey on Business Conditions for the second quarter of 2022 showed that nearly two-fifths (39.0%) of businesses expected to raise prices over the next three months, a continued increase from one-quarter of businesses (25.9%) from the previous quarter.Note Consulting data from the same survey in the first quarter of 2022, Morissette (2022) finds that of firms that expected labour shortages to be an obstacle over the next three months, nearly half (46%) planned to increase wages for new employees, and close to two-thirds (64%) planned to increase the wages of existing employees.

As the result of rising wages, unit labour costs (total compensation of labour per unit of output) have soared. In the second quarter of 2022, unit labour costs (in US dollars) in the business sector were 21.7% higher than in the first quarter of 2019. This can be compared with a growth in unit labour costs of 16.6% in the United States over the same time period. Higher relative unit labour costs, especially relative to key trading partners, make investment in Canada less attractive, and may lead to a loss in future competitiveness.

This article studies how real wages have evolved relative to labour productivity to determine if the increase in wages is in line with price increases and fundamentals. Gains in labour productivity (value-added output per hours worked) are shared between firms and workers. Sharpe et al. (2008b) and Williams (2021) show that, despite some deviations, real wages and labour productivity have grown comparably over the long term. In many countries, however, real wages have grown more slowly than labour productivity.Note Reasons for this phenomenon include globalization and the reduced bargaining power of workers, digitalization and the rise of superstar firms that appropriate a large share of the surplus from production, the rising importance of faster-depreciating capital assets (such as intangible capital) that require a higher capital share to maintain, and shifts in industry structure toward capital-intensive industries.

Following recent studies that have examined this development in Canada in the past—see Sharpe et al. (2008a, 2008b), Greenspon et al. (2021), Sharpe and Ashwell (2021), and Williams (2021)—this article examines the relationship between real wages and productivity. In particular, it analyzes whether the relationship has changed since the beginning of the pandemic, and whether the relationship is sensitive to the use of different deflators to calculate real wages.

Total compensation per hour worked deflated by the gross domestic product (GDP) deflator has grown at a slower rate than labour productivity from the first quarter of 2019 to the second quarter of 2022. While the gap between real wages and labour productivity that has opened since the beginning of the pandemic is precedented, it is close to the limit of its historical range. The entire gap cannot be explained by higher oil and gas prices. Real wages relative to labour productivity have also declined when the oil and gas sector is omitted from the business sector as a whole, though less than when the oil and gas sector is included. Total compensation per hour worked deflated by consumer prices has risen from the first quarter of 2019 to the second quarter of 2022. This has been made possible by faster growth in the prices of goods and services being produced by workers (GDP deflator) compared with the growth in the prices of goods and services being consumed by workers (consumer prices). 

The next section presents the relationship between labour productivity and total compensation per hour worked deflated by the GDP deflator.

Growth in real total compensation per hour worked has fallen behind labour productivity from the first quarter of 2019 to the second quarter of 2022

In this section, the relationship between labour productivity and total compensation per hour worked is examined. In general, firms maximize profits by choosing inputs such that their marginal costs equal to their marginal revenue. In the case of labour, the marginal cost of using an extra hour of labour is the hourly wage rate ( w MathType@MTEF@5@5@+= feaagKart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacaWG3baaaa@3712@ ), while the marginal revenue is the value of the extra production created by working that extra hour holding other inputs constant: 

w=p× ΔY ΔH .                                                 ( 1 ) MathType@MTEF@5@5@+= feaagKart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacaWG3bGaeyypa0JaamiCaiabgEna0oaalaaapaqaa8qacqqHuoar caWGzbaapaqaa8qacqqHuoarcaWGibaaaiaacckacaGGGcGaaiiOai aacckacaGGGcGaaiiOaiaacckacaGGGcGaaiiOaiaacckacaGGGcGa aiiOaiaacckacaGGGcGaaiiOaiaacckacaGGGcGaaiiOaiaacckaca GGGcGaaiiOaiaacckacaGGGcGaaiiOaiaacckacaGGGcGaaiiOaiaa cckacaGGGcGaaiiOaiaacckacaGGGcGaaiiOaiaacckacaGGGcGaai iOaiaacckacaGGGcGaaiiOaiaacckacaGGGcGaaiiOaiaacckacaGG GcGaaiiOaiaacckacaGGGcGaaiiOaiaacckapaWaaeWaaeaapeGaaG ymaaWdaiaawIcacaGLPaaaaaa@7A3F@

p MathType@MTEF@5@5@+= feaagKart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacaWGWbaaaa@370B@ is the price of the firm’s output, ΔY MathType@MTEF@5@5@+= feaagKart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacqqHuoarcaWGzbaaaa@385A@ is the change in the output and ΔH MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacqqHuoarcaWGibaaaa@384A@ is the change in the number of hours worked. The increase in output per additional hour worked depends on the firm’s production technology. Under constant returns to scale, assuming a standard Cobb-Douglas production function, and dividing both sides by the price of output, equation (1) becomes:

w p =α Y H .                                                 ( 2 ) MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qadaWcaaWdaeaapeGaam4DaaWdaeaapeGaamiCaaaacqGH9aqpcqaH XoqydaWcaaWdaeaapeGaamywaaWdaeaapeGaamisaaaaaaa@3CF4@

The real hourly wage is proportional to labour productivity (output per hour worked). That proportion is affected by the production technology being used by the firm, which establishes the relative importance of labour in the production process, α MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacqaHXoqyaaa@37B6@ . Over time, if α MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacqaHXoqyaaa@37B6@ is held fixed, the growth in the real hourly wage would be expected to be equal to the growth in labour productivity. Moving from the firm-level theory to the business sector means that a perfect correlation is not to be expected each period. There are variations in the composition of firms and industries over time, each with its own production technologies and circumstances, and wages are not always being automatically and instantaneously reset by firms. Furthermore, some of these changes can be long-lasting. As discussed, real hourly wages relative to labour productivity have declined in many countries. 

Chart 1 shows that real total compensation per hour worked (hourly wage divided by the GDP deflator) has moved together with labour productivity (real value-added output per hour worked) over time in the business sector. In recent quarters, however, the real wage has declined faster than labour productivity. Total compensation per hour worked deflated by the GDP deflator in the second quarter of 2022 was 7.1% lower than in the first quarter of 2019, compared with only 0.3% lower for labour productivity. Chart 2 shows that while the gap between labour productivity and real total compensation per hour worked in the first and second quarter of 2022 was precedented, it was at the higher end of its historical range and warrants further monitoring. The year-to-date index for 2022 (up to the second quarter) was 93.7, with the base year in 1997 being 100. The lowest data point being 92.7 in 2005.

Chart 2 indicates how real total compensation per hour worked relative to labour productivity has evolved when the oil and gas sector is excluded from the business sector. The data points for 2019 to 2022 year to date are projected for the oil and gas sector, because nominal value added for that sector is not available in those years.Note The oil and gas sector is capital intensive, so labour has a relatively smaller claim to the productivity of the industry compared with labour-intensive sectors ( α MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacqaHXoqyaaa@37B6@  is smaller for the oil and gas sector). A shift towards that sector (higher oil and gas prices raise the oil and gas sector’s share of nominal value added) would slow the growth of real total compensation per hour worked relative to labour productivity. Chart 2 shows that removing the oil and gas sector does slow the decline in real wages relative to labour productivity, but does not eliminate it. From 2019 to 2022 year to date, real wages relative to labour productivity in the business sector declined 3.5% compared with 2.1% in the business sector less the oil and gas sector.Note

Chart 1

Data table for Chart 1 
Data table for chart 1
Table summary
This table displays the results of Data table for chart 1 Labour productivity and Total compensation per hour worked, calculated using index (Q1 1981= 100) units of measure (appearing as column headers).
Labour productivity Total compensation per hour worked
index (Q1 1981= 100)
1981
Q1 100.000 100.000
Q2 100.346 101.272
Q3 99.420 101.816
Q4 99.972 104.377
1982
Q1 100.283 105.220
Q2 101.289 105.849
Q3 102.620 105.114
Q4 102.209 104.735
1983
Q1 104.553 105.255
Q2 104.857 104.824
Q3 104.440 103.386
Q4 106.272 104.420
1984
Q1 108.134 104.784
Q2 109.313 105.686
Q3 108.295 106.081
Q4 109.641 107.247
1985
Q1 110.798 108.252
Q2 109.937 107.609
Q3 109.773 107.766
Q4 110.249 107.513
1986
Q1 108.902 107.329
Q2 109.610 108.328
Q3 109.816 108.387
Q4 107.432 108.363
1987
Q1 109.086 108.597
Q2 109.046 108.129
Q3 110.405 108.631
Q4 110.422 108.953
1988
Q1 111.458 110.348
Q2 111.267 110.998
Q3 110.948 111.101
Q4 110.925 111.468
1989
Q1 111.649 112.360
Q2 111.396 111.790
Q3 110.873 111.590
Q4 110.891 113.183
1990
Q1 111.563 113.839
Q2 110.934 114.234
Q3 110.157 114.145
Q4 110.155 115.633
1991
Q1 110.317 117.365
Q2 110.826 117.469
Q3 111.115 118.719
Q4 111.191 119.136
1992
Q1 112.140 120.031
Q2 112.710 120.959
Q3 113.889 121.277
Q4 114.463 121.739
1993
Q1 114.229 121.229
Q2 115.192 120.120
Q3 116.534 121.269
Q4 116.065 119.657
1994
Q1 117.921 119.887
Q2 118.512 121.053
Q3 118.277 119.311
Q4 117.756 118.150
1995
Q1 119.818 118.758
Q2 119.679 118.489
Q3 118.891 118.715
Q4 119.004 118.381
1996
Q1 118.029 117.991
Q2 118.228 117.791
Q3 118.291 117.745
Q4 119.405 118.846
1997
Q1 121.240 120.019
Q2 122.060 122.320
Q3 122.039 123.113
Q4 122.438 122.417
1998
Q1 125.291 126.045
Q2 124.319 127.150
Q3 124.677 128.681
Q4 125.490 129.501
1999
Q1 128.161 129.545
Q2 127.633 128.180
Q3 129.995 128.595
Q4 129.999 128.302
2000
Q1 132.665 129.894
Q2 134.185 132.026
Q3 135.430 131.693
Q4 134.384 130.630
2001
Q1 134.615 129.351
Q2 136.007 131.567
Q3 137.008 135.606
Q4 138.643 138.660
2002
Q1 139.235 137.144
Q2 138.532 134.475
Q3 138.940 134.321
Q4 138.791 133.691
2003
Q1 138.536 131.266
Q2 139.527 134.792
Q3 139.094 132.626
Q4 138.331 132.291
2004
Q1 137.986 132.002
Q2 139.030 131.772
Q3 140.653 132.560
Q4 141.402 132.678
2005
Q1 141.438 133.281
Q2 142.126 134.405
Q3 143.962 134.436
Q4 145.023 134.338
2006
Q1 145.664 136.312
Q2 144.410 136.252
Q3 144.912 137.514
Q4 145.467 139.538
2007
Q1 146.075 139.632
Q2 145.968 139.043
Q3 145.369 139.642
Q4 144.084 138.209
2008
Q1 143.467 136.667
Q2 143.682 134.649
Q3 145.452 135.479
Q4 144.869 142.873
2009
Q1 143.673 146.019
Q2 144.112 146.609
Q3 144.480 144.533
Q4 146.066 142.527
2010
Q1 145.707 139.910
Q2 144.723 139.911
Q3 146.263 142.487
Q4 146.370 141.136
2011
Q1 147.368 141.654
Q2 147.493 140.900
Q3 148.434 140.758
Q4 149.791 141.362
2012
Q1 149.276 142.724
Q2 148.248 144.032
Q3 147.908 145.091
Q4 147.945 145.424
2013
Q1 148.927 145.146
Q2 149.775 146.032
Q3 151.073 146.517
Q4 152.992 148.271
2014
Q1 152.514 146.441
Q2 155.413 148.935
Q3 156.982 150.197
Q4 157.497 151.579
2015
Q1 156.432 155.921
Q2 154.289 154.864
Q3 154.124 153.748
Q4 154.142 155.423
2016
Q1 154.213 153.001
Q2 153.846 152.681
Q3 156.118 152.090
Q4 156.140 150.489
2017
Q1 157.964 150.415
Q2 158.234 150.668
Q3 157.190 152.269
Q4 157.561 151.876
2018
Q1 157.500 152.788
Q2 158.831 152.130
Q3 159.329 152.395
Q4 158.972 156.531
2019
Q1 159.228 155.911
Q2 159.302 154.681
Q3 160.093 157.333
Q4 160.740 157.979
2020
Q1 166.611 167.562
Q2 187.674 198.683
Q3 169.669 169.695
Q4 166.908 164.375
2021
Q1 162.909 155.316
Q2 162.108 155.272
Q3 160.368 154.160
Q4 159.374 149.682
2022
Q1 158.392 148.258
Q2 158.700 144.897

Chart 2

Data table for Chart 2 
Data table for chart 2
Table summary
This table displays the results of Data table for chart 2 Business sector, Business sector excluding oil and gas and Business sector excluding oil and gas—projection, calculated using index (1997 = 100) units of measure (appearing as column headers).
Business sector Business sector excluding oil and gas Business sector excluding oil and gas—projection
index (1997 = 100)
1981 102 Note ...: not applicable Note ...: not applicable
1982 104 Note ...: not applicable Note ...: not applicable
1983 99 Note ...: not applicable Note ...: not applicable
1984 97 Note ...: not applicable Note ...: not applicable
1985 98 Note ...: not applicable Note ...: not applicable
1986 99 Note ...: not applicable Note ...: not applicable
1987 99 Note ...: not applicable Note ...: not applicable
1988 100 Note ...: not applicable Note ...: not applicable
1989 101 Note ...: not applicable Note ...: not applicable
1990 103 Note ...: not applicable Note ...: not applicable
1991 107 Note ...: not applicable Note ...: not applicable
1992 107 Note ...: not applicable Note ...: not applicable
1993 104 Note ...: not applicable Note ...: not applicable
1994 101 Note ...: not applicable Note ...: not applicable
1995 99 Note ...: not applicable Note ...: not applicable
1996 100 Note ...: not applicable Note ...: not applicable
1997 100 100 Note ...: not applicable
1998 102 101 Note ...: not applicable
1999 100 100 Note ...: not applicable
2000 97 100 Note ...: not applicable
2001 97 99 Note ...: not applicable
2002 97 98 Note ...: not applicable
2003 95 98 Note ...: not applicable
2004 94 98 Note ...: not applicable
2005 93 98 Note ...: not applicable
2006 93 98 Note ...: not applicable
2007 94 98 Note ...: not applicable
2008 93 99 Note ...: not applicable
2009 99 101 Note ...: not applicable
2010 96 98 Note ...: not applicable
2011 94 97 Note ...: not applicable
2012 96 98 Note ...: not applicable
2013 96 98 Note ...: not applicable
2014 95 98 Note ...: not applicable
2015 99 99 Note ...: not applicable
2016 97 96 Note ...: not applicable
2017 95 96 Note ...: not applicable
2018 96 97 97
2019 97 Note ...: not applicable 98
2020 101 Note ...: not applicable 100
2021 96 Note ...: not applicable 96
2022 94 Note ...: not applicable 96

Total hourly compensation per hour worked deflated by the consumer price index has risen because the price of the goods and services produced relative to the price of goods and services consumed has increased

In the previous section, total hourly compensation was deflated by the GDP deflator, the implicit price of the value-added output produced in Canada. From the point of view of a profit-maximizing firm, the use of the GDP deflator is appropriate because it is the price that it receives for its output. However, workers perceive real wages differently from firms, since the combination of goods and services they consume is different from that which is produced. This combination differs because of international trade (e.g., workers consume goods and services from other countries), and because goods created are not all consumed immediately (e.g., investment in housing or machinery and equipment).

The consumer price index is often interpreted as a measure of the change in cost of living for households. It represents the rise in the price level of a typical basket of goods and services purchased out-of-pocket by households. Chart 3 shows how total compensation per hour worked deflated by the consumer price index compares with total compensation per hour worked deflated by the GDP deflator and with labour productivity since the first quarter of 2019. Total compensation per hour worked deflated by consumer prices rose at the beginning of the pandemic, then declined until the first quarter of 2021 and has remained relatively flat since. Overall, total compensation per hour worked deflated by consumer prices in the second quarter of 2022 is 3.6% higher than in the first quarter of 2019. In comparison, labour productivity is 0.3% lower and total compensation per hour worked deflated by the GDP deflator is 7.1% lower. 

The fact that the GDP deflator has risen faster than consumer prices means that the price of the goods and services that workers are producing is rising faster than the price of goods and services that they are consuming. Sharpe (2008a, 2008b) and Williams (2021) refer to this ratio—the price of production to price of consumption—as the labour’s terms of trade. Its improvement (increase over the pandemic), has allowed workers’ total compensation relative to consumer prices to rise relative to labour productivity, despite the decline in total compensation per hour worked deflated by the GDP deflator relative to labour productivity. To make this idea more concrete, the left-hand side of equation (2) can be modified by multiplying it by one, the price of consumption ( p C MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qacaWGWbWdamaaBaaaleaapeGaam4qaaWdaeqaaaaa@382E@ ) over the price of consumption,

w p × p C p C =α Y H ,                                                 ( 3 ) MathType@MTEF@5@5@+= feaagKart1ev2aaatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qadaWcaaWdaeaapeGaam4DaaWdaeaapeGaamiCaaaacqGHxdaTdaWc aaWdaeaapeGaamiCa8aadaWgaaWcbaWdbiaadoeaa8aabeaaaOqaa8 qacaWGWbWdamaaBaaaleaapeGaam4qaaWdaeqaaaaak8qacqGH9aqp cqaHXoqydaWcaaWdaeaapeGaamywaaWdaeaapeGaamisaaaaaaa@439B@

and then rearranging:

w p C =α Y H × p p C .                                                 ( 4 ) MathType@MTEF@5@5@+= feaagKart1ev2aqatCvAUfeBSjuyZL2yd9gzLbvyNv2CaerbuLwBLn hiov2DGi1BTfMBaeXatLxBI9gBaerbd9wDYLwzYbItLDharqqtubsr 4rNCHbGeaGqiVu0Je9sqqrpepC0xbbL8F4rqqrFfpeea0xe9Lq=Jc9 vqaqpepm0xbba9pwe9Q8fs0=yqaqpepae9pg0FirpepeKkFr0xfr=x fr=xb9adbaqaaeGaciGaaiaabeqaamaabaabaaGcbaaeaaaaaaaaa8 qadaWcaaWdaeaapeGaam4DaaWdaeaapeGaamiCa8aadaWgaaWcbaWd biaadoeaa8aabeaaaaGcpeGaeyypa0JaeqySde2aaSaaa8aabaWdbi aadMfaa8aabaWdbiaadIeaaaGaey41aq7aaSaaa8aabaWdbiaadcha a8aabaWdbiaadchapaWaaSbaaSqaa8qacaWGdbaapaqabaaaaaaa@43A1@

Equation (4) shows that total compensation per hour worked deflated by the price of consumption is proportional to labour productivity and the ratio of the GDP deflator over the price of consumption (labour’s terms of trade).

Chart 3

Data table for Chart 3 
Data table for chart 3
Table summary
This table displays the results of Data table for chart 3 CPI, FCE implicit price deflator, GDP deflator and Labour productivity, calculated using index (2019 Q1 = 100) units of measure (appearing as column headers).
CPI FCE implicit price deflator GDP deflator Labour productivity
index (2019 Q1 = 100)
2019
Q1 100.000 100.000 100.000 100.000
Q2 99.428 99.529 99.211 100.047
Q3 100.527 100.728 100.912 100.543
Q4 101.375 101.384 101.326 100.949
2020
Q1 105.576 105.253 107.473 104.637
Q2 123.849 122.327 127.434 117.865
Q3 109.588 108.861 108.841 106.557
Q4 107.185 106.796 105.429 104.823
2021
Q1 104.395 103.916 99.618 102.311
Q2 106.697 106.876 99.590 101.808
Q3 106.052 106.597 98.877 100.715
Q4 103.876 104.563 96.005 100.091
2022
Q1 104.217 104.763 95.091 99.475
Q2 103.603 105.562 92.936 99.668

An examination of the deflators for the components of expenditure-based GDP sheds additional light on this finding. The implicit deflator for expenditure-based GDP and the implicit GDP deflator from the business sector labour productivity accounts are not strictly comparable, because the former is for the total economy, while the latter is for the business sector. Over the 2019 to 2022 period, however, their movements are very similar.

Major components of expenditure-based GDP include final consumption expenditure, gross fixed capital formation and net trade (exports minus imports). Final consumption expenditure includes household final consumption expenditure (the total expenditure on goods and services purchased out-of-pocket by households), and non-profit institutions serving households’ final consumption expenditure and general governments’ final consumption expenditure (goods and services consumed by households but paid for indirectly by non-profit institutions and governments). The implicit price deflator for final consumption expenditure gives a broader measure of the cost of consumption by households than the consumer price index.Note Chart 3 illustrates data for total compensation per hour worked deflated by the implicit price for final consumption expenditure. The data are nearly identical when consumer prices are used as the deflator. Therefore, the price of the other components of GDP expenditure is responsible for the difference in the GDP deflator and the consumer prices.

Table 1 shows the cumulative growth and the contribution to growth of the implicit price deflators for select components of expenditure-based GDP from the first quarter of 2019 to the second quarter of 2022. The implicit deflator for expenditure-based GDP was 20.1%, almost twice that of the rise in the price of final consumption expenditure (10.3%). Both residential (33.3%) and non-residential structures prices (18.8%), important parts of gross fixed capital formation,Note rose faster than the price of final consumption expenditure. The prices for the other components of gross fixed capital formation either grew more slowly than final consumption expenditure (e.g., machinery and equipment and intellectual property products) or composed a relatively small part of gross fixed capital formation.

The rapid rise in export prices for goods (44.4%) over this period also contributed importantly to the difference between the trends in the GDP deflator and final consumption prices. This contribution is displayed in Table 1, which also shows the percent contribution to the cumulative growth of the deflator for GDP at market prices. The contribution of the change in export and import prices (34.0%) is larger than the price growth in gross fixed capital formation (21.7%). The price increase of residential structures (33.3%) accounted for more than half (13.5 percentage points of the 21.7%) of the gross fixed capital formation.

In summary, workers have benefited from the increase in labour’s terms of trade, because it has allowed their total compensation per hour worked deflated by consumer prices to rise, despite the decline in labour productivity and the greater decline in total compensation per hour worked deflated by the GDP deflator.Note Whether this increase in labour’s terms of trade can be maintained in the coming quarters is uncertain. The tightening of monetary policy—the two-percentage-point increase in the policy interest rate—in the second quarter of 2022 will likely have an impact on the price of gross fixed capital formation, particularly residential and non-residential structures. Statistics Canada (2022, July 21) reported that the growth in new home prices decelerated in June 2022. New home prices registered their smallest year-over-year increase since March 2021. Furthermore, the energy component of the Bank of Canada commodity price index declined by 18.7% from June to August 2022.


Table 1
Cumulative growth and contribution to cumulative growth of implicit price deflators for select components of expenditure-based gross domestic product, first quarter 2019 to second quarter 2022
Table summary
This table displays the results of Cumulative growth and contribution to cumulative growth of implicit price deflators for select components of expenditure-based gross domestic product Cumulative growth and Contribution, calculated using percent units of measure (appearing as column headers).
Cumulative growth Contribution
percent
Final consumption expenditure 10.3 39.1
Gross fixed capital formation 19.8 21.7
Residential structures 33.3 13.5
Non-residential structures 18.8 4.5
Machinery and equipment 1.0 0.1
Intellectual property products 8.8 0.8
Non-profit institutions serving households' gross fixed capital formation 18.2 0.1
General governments gross fixed capital formation 13.9 2.5
Exports of goods and services 38.6 53.5
Exports of goods 44.4 50.2
Exports of services 12.2 3.0
Less: imports of goods and services 13.1 -19.5
Net exports 25.5 34.0
Gross domestic product at market prices 20.1 100.0

Conclusion

This article examined the relationship between real wages and productivity. The purpose was to see whether real wage growth (growth in total compensation deflated by the GDP deflator) has lagged behind labour productivity growth over the pandemic. It was found that total compensation per hour worked deflated by the GDP deflator has grown slower than labour productivity since the first quarter of 2019. While this gap is precedented, it is close to the range of its historical limits. The year-to-date index of the gap for 2022 (up to the second quarter) was 93.7, with the base year in 1997 being 100.  This can be compared to a low of 92.7 in 2005.  

Past studies, such as Williams (2021), have shown that the relationship between real wages and labour productivity has remained relatively stable in Canada. Therefore, if the relationship is to be maintained, total compensation per hour worked deflated by the GDP deflator would rise relative to labour productivity in the future. This may not be the case if, over the course of the pandemic, the way in which goods and services are produced in the economy has changed. For example, the increase in automation caused by labour shortages and the need to work in a socially distanced environment will decrease labour’s share of the GDP and prevent real wages from returning to their historical position. 

Past evidence from other countries has shown that labour productivity growth surpasses real wage growth over long periods of time. A number of reasons for this have been put forward, including shifts in industry structure toward more capital-intensive industries. Given the recent increase in oil and gas prices, the relationship between real wages and labour productivity was examined for the business sector excluding the oil and gas sector. The decline in real wages relative to labour productivity was still evident with the exclusion of this sector, but was less than two-thirds the size.

The article also examined the evolution of total compensation per hour worked deflated by the consumer price index. Real wages are often presented using the consumer price index instead of the GDP deflator, because it represents the purchasing power of the total hourly compensation from the workers’ point of view. It was found that, unlike real wages calculated using the GDP deflator, which declined by 7.1% between the first quarter of 2021 to the second quarter of 2022, real wages calculated using the consumer price index rose 3.6% over the same period. This finding suggests that there has been an increase in the price of goods and services being produced in Canada relative to the price of goods and services being consumed. An investigation of the components of the GDP deflator indicates that the improvements in the price of exports relative to the price of imports was the most important factor, followed by higher prices for gross fixed capital formation, particularly in residential structures. The recent tightening of monetary policy (which could dampen the price of structures) and the moderation in the price of oil (which could dampen the price of exports) could weaken these gains in the future.

A disadvantage of the approach taken in this paper is that it stays at the aggregate level. Further insight could be gained if real wages paid to a different group of workers were examined. Although total compensation per hour worked deflated by the consumer price has risen at the aggregate level, it may not adequately describe the experience of all Canadians. The Portrait of Canadian Society survey, conducted from April 19 to May 1, 2022, found that three in four Canadians reported that rising prices are affecting their ability to meet day-to-day expenses (Statistics Canada, June 9). In the future, a more detailed study could shed light on why so many Canadians were reporting this.  

References

Bank of Canada. (2022). Monetary Policy Report, July.

International Labour Organization and the Organisation for Economic Co-operation and Development. (2015). The Labour Share in G20 Economies. Report prepared for the G20 Employment Working Group.

Greenspon, J., Stansbury, A.M., & Summers, L.H. (2021). Productivity and Pay in the US and Canada (NBER Working Paper 29548). National Bureau of Economic Research.

Morissette, R. (2022). Employer Responses to Labour Shortages. Economic and Social Reports. 2(7).

Sabourin, P. & Duguay, P. (2015). Measuring Durable Goods and Housing Prices in the CPI: An Empirical Assessment. Bank of Canada Review, Autumn, 24-29.

Sharpe, A. Arsenault, J.-F., & Harrison, P. (2008a). The Relationship between Labour Productivity and Real Wage Growth in Canada and OECD Countries. CSLS Research Report No. 2008-08. Centre for the Study of Living Standards.

Sharpe, A. Arsenault, J.-F., & Harrison, P. (2008b). Why Have Real Wages Lagged Labour Productivity Growth in Canada? International Productivity Monitor, 17(Fall), 16-27.

Sharpe, A., & Ashwell, J. (2021). The Evolution of the Productivity-Median Wage Gap in Canada, 1976-2019. International Productivity Monitor, 41(Fall), 98-117.

Statistics Canada. (2022, May 30). Canadian Survey on Business Conditions, second quarter 2022. The Daily.

Statistics Canada (2022, June 9). Rising Prices are Affecting the Ability to Meet Day-to-Day Expenses for most Canadians. The Daily.

Statistics Canada. (2022, July 20). Consumer Price Index, June 2022. The Daily.

Statistics Canada. (2022, July 21). New Housing Price Index, June 2022. The Daily.

Williams, D. M. (2021). Pay and Productivity in Canada: Growing Together, Only Slower than Ever. International Productivity Monitor, 40(Spring), 3-26.

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