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Are wages going up? The question everyone's wondering

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Before the pandemic, wages at manufacturing company Promation Engineering Ltd. tended to go up with the cost of living, a nice three to four per cent a year. COVID-19 changed all that.

“We’ve seen an upward pressure across the board, especially for young workers,” Darryl Spector, president of the Oakville, Ont.-based company, said in an interview.

Spector has little choice but to turn to younger, relatively inexperienced workers because the pool of older talent has shrunk, probably because of an accelerated rate of retirement. He’s raised wages by about 10 per cent and in some cases he’s tacked on an extra week of vacation for newbies who used to get only two weeks in the beginning.

It’s a peculiar phenomenon, considering the amount of slack in Canada’s labour market. In August, the country still had more than 155,000 positions to recoup to get back to where it was at the time of the COVID-19 shutdowns. The unemployment rate has been trending down, but still sits above seven per cent, compared with about 5.5 per cent at the start of the pandemic. Statistics Canada reports there were more than 800,000 vacancies in the second quarter, and yet 1.4 million working-age Canadians were unemployed.



There would appear to be lots of supply, yet employers across the country say their demand for talent is going unmet. Spector is currently trying to fill 10 positions, even after bumping up his starting wage and adding vacation days.

Economists are trying to discern what’s going on. The Bank of Canada characterized wage increases as “moderate” in July. Bay Street analysts aren’t so sure. Official data suggests paycheques are increasing at an annual pace of about three per cent, according to a Bank of Montreal report. But those numbers are from the summer. Anecdotal evidence suggests wage pressures continue to build. Six executives interviewed for this story said they have boosted pay by between 10 and 50 per cent.

Some blame the shortage of job seekers on COVID-19 benefits, which they argue have made it too easy for workers to stay home and collect government cheques. Others pin it on American companies, which have taken advantage of the new work-from-anywhere culture to poach from the Canadian rivals.

But, the wage story is a bit more complicated than that.

The conundrum didn’t crop up because of the pandemic; rather, it was an emerging problem for companies that the crisis exacerbated. The labour market already was in a precarious situation at the start of 2020, according to a new report by the Business Development Bank of Canada.

For decades, the make-up of workers has been a drag on economic growth. According to the BDC, since the late 1970s, labour force growth has trended downwards from a high of three per cent, plummeting to one per cent by 2016 and declining since. The participation rate, a metric of the share of the working-age population that is either looking for a job or has one, has followed in step. In the early 2000s, it hovered close to 67 per cent, but has now declined to 62.5 per cent. Since 2011, Canadian companies’ demand for workers has far outstripped supply.

“As the economy recovers, this scarcity of workers is reaching worrying heights, putting economic growth at risk and compromising the competitiveness of Canadian businesses,” Pierre Cléroux, chief economist at BDC, said in the report.

This scarcity of workers is reaching worrying heights, putting economic growth at risk and compromising the competitiveness of Canadian businesses

Martin Basiri, CEO and co-founder of Waterloo, Ont.-based ApplyBoard Inc., said the pandemic aggravated the tightening labour market because it accelerated the digitization of nearly everything, from classes moving online to mom-and-pop restaurants creating their own apps for takeout and delivery.

“Now, a bigger portion of companies are going for tech talent while total supply didn’t go up,” said Basiri. “Before the pandemic, we had a hard time hiring software developers. Now, we have an even harder time.”

ApplyBoard, a platform that helps international students get into post-secondary schools, currently has more than 400 openings, though not all are developers. Still, Basiri said developer salaries have increased 30 to 50 per cent since just before the pandemic.

For Vetster, Inc., an online vet telemedicine portal, compensation has increased between 15 to 30 per cent and the two-year-old company with 35 employees is hiring for enough positions to double its size. CEO and co-founder Mark Bordo said wages are being pushed higher by competition from south of the border, where companies are taking advantage of a favourable exchange rate to nab precious talent at a discount. At the same time, he said the issue is bigger than that because it’s not only coders and engineers who are demanding higher wages. “It’s across the board,” he said. “Whether you’re looking for somebody for customer experience, marketing, or product development, their starting salary expectations are higher than what they used to be.”

Generally, rising wages can be an economic benefit because for too long, paycheque growth has remained slow in Canada. “If the current trend persists, in some ways that’s good for narrowing the income distribution,” said Sal Guatieri, a senior economist at Bank of Montreal.

Still, there’s a risk that higher salaries will stoke inflation, which already is running well in excess of the Bank of Canada’s target. If employers raise the cost of their products and services to offset higher wage bills, the “good inflation” from higher pay could contribute to a price spiral. The Bank of Canada probably would like wages to increase, as that would aid economic growth, but policy-makers probably would raise interest rates if pay gains started to get out of hand, said Derek Holt, an economist at Bank of Nova Scotia. “(Wage growth) would be a welcome form of inflation but not one that (the Bank of Canada) can allow to go on,” Holt said.

It’s not only tech companies that are seeing the pressure. In the restaurant sector, wages anecdotally are increasing. At Darrell’s restaurant, a burger joint in Halifax, hourly wages in some cases have gone up 25 per cent. “We’re starting line cooks with almost no experience at $15 now and we’re hiring cooks with experience for far more money than that because you just can’t find good people with a good work ethic to step into the position,” said Steve McLean, an operations manager who had managed to fill only two of nine vacancies since the beginning of August.

In the manufacturing sector, Dennis Dussin, president of Alps Welding Ltd., said his wages for skilled tradespeople are going up about 10 per cent, similar to Promation. The salary pressures for the specialty welding manufacturer are beginning to bleed into quotes for projects. “We have seen costs increase on labour and material, so our quoted prices have been going up,” he said.

Adam Froman, CEO of Delvinia Holdings Inc., has been able to avoid price increases on his products, but salary pressures are an issue. Since the pit of the recession last year, the research technology firm has grown from 60 employees to 100 and is looking to add another 20. “As long as companies like ours continue to grow, we’re going to have severe competition for talent and salaries will go up,” Froman said. Salary increases at Delvinia range from 15 to 30 per cent, but to address the labour supply gap, Froman is bringing on workers with more junior experience to mentor and train them up, which also helps mitigate wage pressures slightly.

Ultimately, the uniqueness of this recession has brought on wage growth, said Spector, Promation’s president. People are exiting the labour market, either retiring early or leaving industries entirely because they were furloughed. “You’ve got to fill those seats with people with experience that is lacking,” he said. “That’s going to cause increased cost pressures on the remaining cohort that has experience and a desire to stay in the industry and also … younger, less experienced workers in the pipeline.”

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