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Why wages in low-income industries are still languishing despite high vacancy rates

Pedestrians walk past a
Many low-income businesses are still reluctant to hike wages despite a high number of job openings. REUTERS/Brian Snyder

Labour shortages continue to plague low-wage industries despite many aspects of the job market, such as the unemployment and participation rates, returning to pre-pandemic norms.

Typically, when there's low supply and high demand, basic economics dictates the price (of labour, in this case) should rise.

However, data from CIBC Capital Markets found wage growth in low-paying industries has not outperformed wage gains in higher-paying industries despite the disproportionate number of job openings.

CIBC deputy chief economist Benjamin Tal says there are a number of potential reasons why these businesses still haven't hiked worker pay.

"Any economist will tell you that the Labour Force Survey is a volatile data series and can be prone to data collection and measurement issues, not to mention the survey on wages doesn't provide a full picture of compensation."

"The pandemic has induced a change in what workers demand from their employer, with the importance of wages falling in many sectors," he said in a note on Tuesday.

"For instance, workers now demand more flexibility in work location and better working conditions and are willing to forgo wage increases to get them. In some industries, such as accommodation and food, there is also anecdotal evidence that businesses are providing other benefits (e.g. health benefits), a relative novelty for workers in this sector."

Another aspect that might be taking some of the onus off business owners from raising employee wages, particularly in the service industry, is the fact that many customers are tipping more generously.

Surveys suggest many Canadians increased tips given to restaurant and bar staff and food delivery workers during the pandemic to compensate for the health risks they were taking. That trend seems to have persisted as the cost of living rose.

"But while this means that compensation could have increased by more than the wage data show, it has clearly not increased enough to clear the market," Tal said.

He also questions the ability of businesses to increase wages at a time when input costs have risen dramatically and six provinces, including Ontario, Saskatchewan, Manitoba and two maritime provinces, boosted their minimum wage on Oct. 1, even though critics say the increase is still not enough to support basic living costs.

Tal also says the gloomy economic outlook could be a significant deterrent.

"While service industries overall are generally less sensitive to traditional downturns than goods-producing sectors, some services tied to discretionary spending, such as restaurants, travel, and retail trade, will feel the pressure of a slowing economy. And because wages don't typically fall on a nominal basis (what economists call downward nominal rigidity), employers in those sectors may be reluctant to raise wages further as they face yet another uncertain future," he said.

Inflation implications

Wage gains in low-income industries can have very different impacts on the economy and inflation compared to salary increases in high-paying sectors, because of how the money is spent.

Tal explains that when low-income individuals, who are often cash-strapped, have their pay hiked, they're more likely to spend that additional money on goods and services, whereas a higher-earning individual might choose to invest extra cash in the stock market.

Statistics Canada data showed August job vacancies moderated from the previous few months but still hovered near the one-million mark.

The agency also says the number of job vacancies held steady in the accommodation and food services industries, and increased in the retail sector.

"Low-wage workers are enjoying their best bargaining position on record, but it appears that so far businesses are unwilling or unable to lift wages at a rate needed to clear the market," Tal said.

While that's not good news for workers, Tal says this trend might be in the Bank of Canada's favour as the central bank desperately tries to prevent a wage-price spiral from happening.

However, looking ahead, Tal says the most likely scenario is job openings starting to disappear as the economy slows, lessening the bargaining power of employees in general.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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