Recent Wage Deceleration: Short-Run Response or Structural Change?

Labour Relations

Since 1982, wage inflation in Canada has shown a pronounced deceleration. Wage settlements and rates of increase in various measures of earnings have declined to their lowest level in the past 25 years. Wage cuts, wage freezes, de-indexing, and flexible compensation in the form of two-tier wage systems and lump-sum payments in lieu of wage increases have become a frequent occurrence in collective bargaining. This wage experience is somewhat of a novelty for Canada, and is also unique among OECD countries.

Many observers are wondering if the recent wage behaviour and related collective bargaining outcomes mark a turning point in industrial relations. More specifically, do the wage developments of the past few years reflect a fundamental change in wage setting processes or are they simply a natural and temporary response to the long and severe recession of 1981-82 and the subsequent uneven pattern of economic recovery?

This paper attempts to explore these questions. Its purpose is twofold: (a) to review recent trends in various wage indicators, in particular the wage and related outcomes of collective bargaining; and (b) to assess empirically if these trends are a product of the changed economic and labour market conditions or represent a structural change in wage setting processes.

The paper is divided into four sections. The first section looks at various aggregate wage and earnings series, including the base rate increase in new collective agreements, with a view to deriving some firm conclusions on the recent wage behaviour. Wage performance in post-war recessions and recoveries, and the developments in Canada and the U.S. are also briefly compared and contrasted. The following section examines in more detail wage and related outcomes of collective bargaining. In section three, predictions from estimated Phillips Curve wage equations are compared with actual wage increases to assess whether the recent wage deceleration can be explained by the high rates of unemployment and the steady decline in inflation since 1982, or represents a structural change in wage setting processes. The last section of the paper summarizes the extent and nature of wage flexibility and its policy implications.

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