Labour Compensation Trends 1

 Earnings are a big deal  That’s all we talk about! 2

 Nominal wage = rate of pay in current dollars  Real wage = quantity of goods and services that one can buy with the nominal wage  Nominal: good for comparing at any given time  Especially present  Because the point of the reference is working  Real: good for thinking about rewards to labour over time  Nominal wages AND prices change 3

 Real wage calculations need  The nominal wage over time a measure of the price level  The nominal wages are out there  And for a measure of the price level we take CPI  CPI measures the cost of a consumption basket, relative to a base year  Why CPI?  Then real wage = (nominal wage / CPI) x 100  Here are some developments Here are some developments 4

 Another common way is to build a real wage index  Real wage index = (nominal wage index / CPI)  Where nominal wage index is the wage relative to a base year  Check your book for longer developments  Canadian wages grew nicely up to late 1970s  And then essentially stagnated  Real wage index in 1950 = 46.2  Real wage index in 1980 =  Real wage index in 2003 =  Why? 5

 One way to think about it comes from macroeconomics  Labour’s share of GDP = Y/L  Labour’s share of GDP = Y/L = (WxE)/(PxY R )  Labour’s share of GDP = (W/P)/(Y R /E)  Labour’s share of GDP = real wage / productivity  Used to be very stable (Cobb-Douglas)  Labour’s share of GDP grew WWII to late 1970s, then declined The median real earnings of Canadians barely increased between 1980 and 2005; over the same period, labour productivity rose by 37.4 per cent. 6

Possible explanations: – Measurement issues Moving from earnings of full-time full-year workers to labour compensation per hour explains about one-fifth of the real wages and labour productivity growth gap over the period – Rising earnings inequality, as captured by the difference in average and median real earnings growth, accounts for about one-quarter of the gap 7

Labour’s terms of trade deteriorated significantly from 1980 to 2005, and accounted for 33.3 per cent of the gap between the growth in real median earnings and labour productivity – Changes in labour’s terms of trade are equal to changes in the GDP deflator less changes in the CPI. For example, if the prices of the goods produced by workers, which are measured by the GDP deflator, rise more quickly than the goods consumed by workers, measured by the CPI, then the workers are better off; their terms of trade have improved Turns out the price of investment goods did rise much slower than price of consumption goods Computers! 8

declining unionization deregulation increased competition from low-wage countries an increased profit share Oil! 9

Personal income distribution – The gender gap Stagnant wages for men Rising wages for women Still a gap Occupational segregation Less hours at work for women – The age gap Has widened since 1980 Mid-30s seem to divide losers and winners in real wage trend Somewhat reversed in 2000s – Occupational earnings polarization Somewhat reversed in 2000s 10