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Economic Uncertainty and Wage Growth
Despite the economic uncertainty, paycheques in Canada are still on the rise. This trend could keep inflation stubbornly persistent. National Bank economists, Matthew Arseneau and Alexandra Ducharme, have noted this intriguing situation.
A Surprising Trend
Over the previous year, we’ve seen hourly wages grow by about 3.5%. However, this hides a more startling acceleration. In the past six months, wages have increased at an annualised rate of roughly five per cent. Both the Labour Force Survey and the Survey of Employment, Payrolls and Hours back this finding.
Excess Labour Supply and Unexpected Jobs
Interestingly, this acceleration is surprising given Canada’s excess labour supply since the third quarter of 2024. Before trade tensions with the U.S. heightened, the labour market added an unexpected 53,600 jobs in November. However, economists like BMO’s Douglas Porter observe signs of labour market weakness. The growth seems driven entirely by part-time positions.
Lagging Wage Responses
Wage responses usually trail behind labour-market conditions. Nevertheless, the current lag seems particularly long. Earlier increases in unemployment, especially over the past year, have been gradual. There’s been no significant wave of layoffs. Thus, a high proportion of the unemployed remains long-term.
Long-term Unemployment Impact
Several studies suggest that long-term unemployed individuals have less impact on wage growth. There’s a mismatch between their skills and those employers seek. Additionally, their skills and employability may erode over time.
Inflation Shock and Wage Pressure
The recent inflation shock might explain the disconnect between wage pressures and excess labour supply. Many workers, especially those in unions, aim to recover purchasing power lost to inflation. In 2025, wage negotiations led to average annual increases of 3.3%. This figure is notably above pre-pandemic levels.
The Impact of Extended Contracts
On average, wage contracts run slightly over four years. Consequently, these heightened wage costs are locked in, maintaining pressure on business expenses and, ultimately, inflation.
A Broader Perspective
The circumstances point to a complex interplay between economic conditions, wage growth, and inflation. While part-time employment drives short-term growth, long-term impacts could differ. Thus, businesses and policymakers must scrutinise these trends closely.
For further reading on economic trends and wage impacts, consider reviewing resources from the National Bank and BMO.
