Will higher wages impel greater spending? Not so fast, economists say

The Canadian workforce is finally seeing more earnings, with paychecks having grown upwards of 4% annually in the last few months – among the fastest increases since 2009, according to a Bloomberg report.

However, contrary to some optimistic predictions, the trend is not likely to lead to greater spending in housing and other amenities. This is because productivity levels have remained relatively static over the last two years.
This will lead to companies either reducing their output or dialling up their prices – essentially negating the gains described.

“Without productivity growth, it could mean employers say labour costs are too high and they start cutting back on their demand for labour,” Indeed Canada economist Brendon Bernard told Bloomberg in an interview.

And while such a step would help ease wage pressures, “it would also mean Canadian workers don’t feel that they’re getting ahead.”

Toronto-Dominion Bank chief economist Beata Caranci is also among those doubtful of productivity moving higher in the near future.

“Something’s got to give,” Caranci said. “One of the big pushes for productivity has come from the energy sector and that looks like that’s not really a logical pathway for strong growth going forward.”

The warnings came amid a recent survey by the Manulife Bank of Canada, which found that nearly half of Canadians believe that their spending is growing faster than their incomes.

As of the end of September, around 45% of those polled stated that their spending is considerably outstripping their income growth, up from the 33% in spring 2019. Only 12% said that their earnings are growing faster than their rate of spending.