(Bloomberg) --
Canada's economy is producing slower wagegrowth than what would be expected given the overall strength ofthe labor market, a potential sign of continued slack, thoughpay gains should accelerate as the economy emerges from itsslowdown, according to the Bank of Canada's No. 2 official.
Wage gains that averaged about 2.5 percent last year arestill below what would be consistent with a tight labor marketthat would ordinarily fuel inflation pressures, Senior DeputyGovernor Carolyn Wilkins said in a speech that sought to take acloser look at the issue.
“The Bank has pointed to relatively subdued wage growth asa possible sign that the job market may have more room to run,”Wilkins said.
Weakness in the oil sector is partly responsible, alongwith some structural factors such as underemployment in the“gig” economy, she said. At the same time, the evidence showsother sectors and regions are producing wages gains moreconsistent with a tighter labor market.
“Some of the weakness in wage growth can be explained bycontinued adjustment in energy-intensive regions to lower oilprices,” Wilkins said. “We also need to be mindful of strongerwage gains and signs of labor shortages in other parts of theeconomy. Monetary policy must be forward-looking.”
Wilkins reiterated the Bank of Canada's most recent outlookthat weakness in the oil and housing sectors is expected to beonly temporary. At a rate decision earlier this month, the Bankof Canada indicated the slump has made its push toward higherinterest rates less urgent, but policy makers have also stuck totheir view that further hikes will eventually be needed.
“We expect the economic expansion to pick up again afterthis detour, in the second quarter of 2019,” Wilkins said,“This should lead to a pick-up in wage growth as well.”
Her speech looked in depth at the puzzle of why lowunemployment hasn't produced faster wage gains. Canada's joblessrate of 5.6 percent is at the lower end of the central bank'sestimated range of the country's natural unemployment rate ofbetween 5.5 percent and 6.5 percent, Wilkins said.
“By many measures, the labor market in Canada is in goodshape,” she said.
Still, that measure of trend unemployment is highlyuncertain, meaning the Bank of Canada should also be looking atother data such as wages for indications of slack.
An economy with a tight labor market should be able toproduce wage growth of around 3 percent, according to Wilkins.She found an important factor for the sluggishness was laggingpay in oil producing regions. There are also some other sectoralchanges going on in the economy such as fast growth in service-sector jobs.
But those don't fully explain the phenomenon.
“Even after accounting for these regional and sectoralfactors, wage growth overall is still a bit short of what onewould expect at this stage,” she said.
She outlined a list of other potential factors thatincluded: skills mismatches, caution among workers to changejobs, reluctance to move, expensive housing in some markets, andglobal structural factors such as technological disruption andgrowing market concentration.
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