By: Alex Carrick on March 2nd, 2018
The Trend Lines of Wages as Drivers of Inflation, U.S. and Canada
In 2017, the economy sailed along with the wind mainly at its back. There was only intermittent stormy weather and few impediments to the steady and record-breaking climbs in stock market indices.
Early indications from 2018, however, point to a course alteration into choppier waters. An onset of the jitters this year has been particularly apparent among equity investors.
Their anxiety levels have been elevated by thoughts that inflation, after long lying dormant, may soon heat up again.
The strength in the economy has been fueling jobs creation and shrinking the unemployment rate to a rare low of just 4.1%.
There is much talk of wage hikes, but to what extent are they truly underway? Variability in the monthly numbers often obscures rather than clarifies what is happening. Therefore, through the insertion of trend lines in graphs, this article will show the improvement in wages empirically.
Each month, when the Bureau of Labor Statistics (BLS) releases its Employment Situation report, economists turn to Tables B-3 and B-8 to note the latest average hourly and average weekly earnings results.
Today, for the U.S., we’ll focus on hourly rates. A year-over-year gain of +3.0% or more serves as a good yardstick for when wages switch from a simmer to a boil.
There is a long history of data for B-8 which covers only ‘production and supervisory personnel’. B-3 includes bosses, and is thus more expansive, but its data series only go back as far as March 2006.
Graphs 1 to 4 show year-over-year percentage changes in hourly wage rates for economy-wide workers and for construction workers specifically.
All four graphs present excellent opportunities for ‘fitted’ trend lines extending back over several years.
As can readily be seen, the trend lines for construction (Graphs 3 and 4) are steeper than for all-jobs (Graphs 1 and 2), but that’s partly because the starting figures for all-jobs, at just under +2.0%, are higher than they are for construction, at just under +1.0%.
Another way of saying the foregoing is that year-over-year hourly wages in construction fell below all-jobs at their post-recession worst.
But it’s equally important to note that the ending points for construction are a little higher than they are for all-jobs.
The January 2018 data points for the year-over-year hourly wages of all-jobs in Graph 1 (which includes bosses) show the ‘actual’ increase to be +2.9% and the trend line increase to be +2.6%. While the trend line has been steadily rising for seven years, the final data points have still not reached the +3.0% benchmark.
(Employees, Including Bosses − All Jobs)
The January 2018 data points for the year-over-year hourly wages of all-jobs in Graph 2 (which excludes bosses) shows both the actual and trend line increases to be +2.4%. There has been a steady upward progression in the trend line over the past six years, but the benchmark +3.0% remains a good-sized step away.
(Production & Non-supervisory Personnel − All Jobs)
The January 2018 data points for year-over-year hourly wages in construction in Graph 3 (which includes bosses) show the ‘actual’ increase to be +2.9%, but the trend line increase to be +3.3%. The trend line has been steadily climbing for seven years and it has been above the benchmark +3.0% for the past nine months.
(Employees, Including Bosses − Construction)
The January 2018 data points for year-over-year hourly wages in construction in Graph 4 (which excludes bosses) show the ‘actual’ increase to be +2.9%, but the trend line increase to be +3.4%.
Among all the U.S. charts, Graph 4 is where the trend line has been shooting upwards most dramatically, going from +1.0% to +3.4% in the space of five years.
(Production & Non-supervisory Personnel − Construction)
The U.S. all-items inflation rate is currently (i.e., January 2018) running at +2.1% year over year. But the nation’s general price level won’t be given a big push higher from all-jobs wage increases until the earnings trend lines climb above +3.0%.
Rather, it may soon be the case that all-items inflation will be impacted most by trade policy. Substantial tariffs are already being imposed on softwood lumber imports and are expected to be introduced on foreign inflows of steel and aluminum. Duties of from 10% to 25% on such key material inputs will ratchet up purchase prices for a vast array of consumer goods.
As for construction charges, they are receiving a boost on the labor compensation side, as on-site wages are now trending above +3.0% year over year. At least as important as labor for construction costs, however, are global prices for internationally-traded commodities (i.e., the cornerstones of building materials). They are on the move again, plus they also aren’t being lifted in America by stiff import duties.
In Canada, the two most closely watched data series on labor compensation are average hourly and average weekly wage rates, both found in Statistics Canada’s Cansim Table 282-0073. The year-over-year histories of both are set out in Graphs 5 and 6.
A bit of a fuss erupted in the Canadian media when the nation’s average weekly wage rate ballooned to +3.7% year over year in the latest month (January 2018). But it can be seen from Graph 6 that +3.7% is not jump-up-and-down extraordinary.
Since the Great Recession, there have been two other times when average weekly wages approached +4.0% y/y, in the fall of 2012 and in the summer of 2015.
And while there has been an upwards climb in average weekly wages in Canada since April of last year, there has not been a lengthy period of sustained advance crying out for the overlaying of a trend line like there has been with the U.S. data.
There are similar observations to be made with respect to Graph 5, which records year-over-year average hourly wage rates in Canada. January 2018’s data point of +3.3% is another stride up a slope with a base in April 2017’s hollow, but it still falls far short of the +4.9% that occurred in early 2009.
As a final note to provide context, the peak for all-items inflation in the U.S. since 2000 was +5.6% y/y in the summer of 2008. In Canada, all-items inflation most recently maxed out at +3.7% in March 2011.
(Total Employees - from Labour Force Survey/LFS)
(Total Employees - from Labour Force Survey/LFS)