U.S. wage advantage is growing

Canadians fall farther behind American workers

Signs of rising wages in the United States sent stock markets into a tizzy yesterday, renewing worries that the U.S. Federal Reserve may soon raise interest rates to head off inflationary pressures.

But a report, which showed the biggest quarterly increase in U.S. wages in eight years, also underscores worries of a more permanent sort. It shows, said Robert Fairholm of Standard & Poor's DRI Canada, that the wage lag for Canadians is getting much worse than it was only a few years ago.

"Their wages are increasing sharply, while ours have been modest at best," said Mr. Fairholm. "Consequently, the gap between Canada and the U.S. is widening."

That type of long-term thinking played little or no role in how North American stock markets greeted the news, however.

The surprisingly strong 1.1 per cent rise in the U.S. Employment Cost Index in the second quarter caused a selloff in markets.

Traders interpreted it as a strong sign that the U.S. Federal Reserve Board will soon raise interest rates to try to cool down the inflationary effect of rising wage rates, along with rising prices.

If the U.S. raises interest rates, many economists predict Canada will have to do the same.

The New York Stock Exchange's benchmark Dow Jones industrial index tumbled 250 points, at one point during the day, before recovering a bit. It was still down 180.78 points, or 1.7 per cent, to 10,791.79 at the close of trading.

The Toronto Stock market's TSE 300 index ended the day with a more modest loss of 60.86 points, closing at 7050.33.

The latest report on rising U.S. labour costs was in sharp contrast to what happened in the first three months of the year when costs rose 0.4 per cent, the index's lowest-ever increase.

The report, "pretty much seals it, that the Fed will tighten" monetary policy and bump up rates, perhaps as early as August, Mr. Fairholm said.

But even if the policy succeeds in cooling down inflation and slowing wage gains, it is unlikely to trigger changes dramatic enough to affect the wage gap between Canada and the U.S. workers.

In the first quarter of 1995, Americans made $38,000 per employed person (using the existing exchange rate of $1.4), while Canadians made $26,900 -- a gap of $11,100.

By the first quarter of this year, Americans were making $48,600 (using the existing exchange rate of $1.5), while Canadians made $28,800 -- a gap of $19,800.

Assuming the existing exchange rate remains constant, that gap will widen a further $7,100 by the end 2003, according to Standard & Poor's forecast.

And that's not counting a more favorable tax system in the U.S. Once that is factored in, "you take home a lot more in the U.S. than in Canada," said Mr. Fairholm. "That's why it is amazing to me that we don't have more of a brain drain than we do."

There are explanations for why the U.S. has moved ahead so quickly in the past few years. Its economy has been on a red-hot streak over the past several years, reaching a level where unemployment is just 4.3 per cent and workers have more clout in demanding higher wages.

While Canada's economy has been growing, it hasn't grown so quickly. Its unemployment rate is much higher, at 7.6 per cent, with relatively more people still available to fill jobs.

The likelihood that U.S. will continue to leading Canada in wage gains over the next few years, holds both good and bad news for Canadians.

"The problem part comes in terms of the brain drain," said Mr. Fairholm. "As the gap between Canada and the U.S. becomes even wider, the likelihood of the trickle becoming a flood increases, as people recognized that it is more profitable to move to the United States."

That could be particularly evident in areas like the high-tech sector, which is relatively small as a portion of each country's economy, competes fiercely for the best and brightest.

But lagging behind in wage increases also has some benefits. Canadians, in fact, have been gaining jobs at the expense of the U.S. because the dollar and wage rates are lower.

"That gives employers an incentive to hire in Canada," said Mr. Fairholm. But it also "gives them an incentive to lure Canadians to the United States."

Sherry Cooper, chief economist at Nesbitt Burns, shares Mr. Fairholm's worries that the wage gap will accelerate.

While there aren't exactly comparable ways to measure wage rates in each country, the closest measure shows wages rising at an annual rate of 3.2 per cent in the United States and at two per cent in Canada this year, she says.