Magazine article International Productivity Monitor

VI. Explanations of Developments in the Relationship between Labour Productivity and Real Wages in Canada

Magazine article International Productivity Monitor

VI. Explanations of Developments in the Relationship between Labour Productivity and Real Wages in Canada

Article excerpt

Previous sections have summarized the theory and challenges underlying the measurement of the relationship between labour productivity and real wages as well as reviewed recent trends in Canada and other OECD countries. This part of the report suggests possible explanations for changes in the relationship in Canada. The first section provides a decomposition of the difference in growth rates between a commonly used indicator of compensation, median earnings, and labour productivity since 1980. The second section briefly examines how labour's terms of trade have evolved since 1961, and points out potential areas for further research. The third section narrows the discussion to the labour share. It discusses the potential effect of business cycles and structural factors on the labour share in Canada.

A. An Accounting Perspective on the Relationship between Labour Productivity and Real Wages in Canada

In May 2008, Statistics Canada (2008) released a comprehensive review of the earnings of Canadians between 1980 and 2005 based on census data. A widely reported finding was that the median earnings of full-time, full-year workers in Canada rose only $53 dollars, from $41,348 (2005 dollars) in 1980 to $41,401 in 2005. In light of the significant labour productivity gains over the same period (37.4 per cent), this finding begs the question of whether workers have an interest in labour productivity growth when they do not seem to benefit from it. This part of the report also seeks to explain where these productivity gains have gone.

As was discussed in part IV, a number of conceptual and methodological hurdles stand in the way of a meaningful comparison between labour productivity and earnings growth. This section provides an accounting analysis of the gap between stagnant median earnings and labour productivity growth in an attempt to quantify the role of particular methodological differences between the two measures. (15)

The apparent discrepancy between labour productivity and earnings is in part a result of inconsistent measurement. The two measures embody different definitions and concepts that are either not comparable, or cannot be meaningfully compared as they lack consistency. As shown in Summary Table 14, about one fifth of the 1.26 percentage-point gap between annual median earnings growth and annual labour productivity growth over the 1980-2005 period was due to measurement issues.

First, to make a meaningful comparison between earnings and labour productivity, the same unit of labour input must be used. While census earnings are reported for full-time full-year workers, productivity is reported for all workers and is generally expressed on an hourly basis. In our analysis, the transformation from full-time, full-year workers to hours was divided in two steps (Summary Table 15). First, it was noted that the average earnings of full-time full year earners grew at about the same rate as that of all earners, where an earner is defined as anyone with earnings during the year rather than an average of the monthly number of earners as is the case for the definition of annual average employment. Second, it was found that the number of hours worked per year per earner has increased slightly over the 1980-2005 period, up 2.25 per cent or 0.09 per cent on an annual basis.16 Adopting a more appropriate measure of labour input, hours worked, thus increases the gap by 0.10 percentage points (7.9 per cent).

Second, the census earnings definition is not an exhaustive measure of total labour compensation as it excludes supplementary labour income, which includes employer contributions to social insurance programs such as CPP and EI, which can be considered a form of delayed or future earnings. As noted earlier in the report, national accounts data show that nominal supplementary labour compensation increased much faster than census earnings, boosting average total labour compensation. …

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