Why earnings in Alberta have been stagnant for years

Alberta's recent recession was long and deep. Five years later, we're still recovering.

Between 2014 and 2016, total incomes of workers, business, and government combined fell by nearly 20 per cent. That's 75 billion fewer dollars per year in Alberta's economy. That's not even the worst of it. Relative to our growth path prior to the recession, we're down $100 billion per year, compared to where we thought we'd be.

Plunging corporate profits account for most of that drop, but workers weren't spared. Fewer hours, fewer jobs and, in some cases, lower wages continue to take their toll. And while the recession ended over two years ago, the recovery has been slow and earnings growth especially so.

What's behind our stagnant earnings? Will we return to pre-recession highs? What can government do to help? The latest data, and some new analysis, sheds light on these important questions and provides needed perspective.

Albertans earn less. A lot less.

Albertans earn less because they're working less, and working differently. Government can help in some ways, but only at the margins. Lower earnings today largely reflects a natural adjustment that's moving Alberta to a more normal and balanced labour market.

The boom years that ended in 2014 were the outliers, not where we are today.

Except for a recent spike in May, earnings have been largely flat for the past year and a half. And as I illustrate below, the modest earnings growth seen by Albertans in recent years was fully eroded by inflation.

Since 2011, prices in Alberta have increased nearly 18 per cent — eroding what individuals can buy with their income. So despite an 18 percent increase in earnings, the typical worker is no further ahead. The $1,183 per week a typical worker earns today goes about as far as $1,000 did nearly a decade ago.

That's disappointing, especially in light of gains elsewhere in Canada. Had earnings growth kept pace with the rest of the country, workers would be earning roughly 10 percent more, or an additional $120 per week. That would put over $6,000 a year in the pocket of the typical Alberta worker and add nearly $12.5 billion to the economy as a whole.

To be clear, Albertans still earn more than most workers elsewhere. At $1,183 per week, Albertans are far above the next highest province of Saskatchewan, where the typical worker brings in $1,070 per week. But despite our lead position, years of disappointing growth matters. It takes a toll on families who were planning on stronger gains and dampens confidence in the overall economy, which remains low today.

So why are earnings failing to grow? And how concerned should we be? It comes down to two simple reasons: how much and where are Albertans working.

Albertans are working less

It's not that overall wages have fallen. Rather, Albertans are working less.

The typical hourly employee in the province works just over 31 hours per week — down two full hours since the pre-recession peak of 33 hours per week. Over the course of a whole year, those two hours add up to a lot. At the current average wage of $28 per hour, two fewer hours per week means incomes are nearly $3,000 per year lower.

While certainly disappointing, a broader perspective is needed. An average 31-hour work week is low relative to 2014, but it's above the Canadian average of 30. And, more importantly, 31 hours is in line with what could be considered normal for Alberta. In the decade leading up to 2010, average hours worked fluctuated near 31 per week.

In other words, the years between 2010 and 2014 were exceptional. Today, we've returned to normal.

Not all hours pay the same, of course. Overtime adds significantly to a worker's typical paycheque and those hours are down, too. Some work more, others work none, but the typical worker in Alberta works just over one hour of overtime per week. Since the 2014 peak, overtime is down almost one hour per week.

But, again, this returns Alberta's economy to the pre-boom norm.

Working differently

Since the recession started, we've seen a big shift in where the jobs are. Sectors with average wages above $30 per hour employ nearly 100,000 fewer Albertans today than they did in late 2014, while other lower paying sectors employ 40,000 more.

Much of the decline in high-wage employment is concentrated in only a few sectors: construction (down more than 45,000 jobs), mining, oil and gas (down nearly 35,000), and professional services (down 18,000), while the gains are found in retail, health and social services, education, and to a lesser extent transportation jobs and public administration.

Low oil prices caused much of this, so those jobs are unlikely to rise to pre-recession levels anytime soon — if ever. Oil prices are not only expected to remain far below their prior highs, but corporate operations are significantly more efficient. Lower costs in the face of lower prices lead many businesses to streamline and improve operations, so fewer workers are needed.

So with hours down and jobs shifting, what should Albertans expect next?

Will earnings growth return?

Since Albertans have returned to working a more normal number of regular and overtime hours, and since resource jobs are unlikely to return to pre-recession highs anytime soon, much of the recent earnings decline may be here to stay.

Of the $120 per week wage hit Albertans are seeing relative to the rest of the country, two-thirds of that is due to fewer hours and shifting jobs, leaving only $40 per week in lower earnings due to disappointing wage growth. And most of that gap has opened up only fairly recently. This is in stark contrast to the earlier illustration of Alberta earnings massively lagging behind the rest of Canada.

This doesn't mean Alberta should settle. Just that we should temper our expectations, and focus our attention.

There is a role for government to help boost wage growth. One policy change that might help has already been implemented: the corporate tax cut.

I know what you're thinking: "Trickle-down economics doesn't work!" While there are valid concerns around inequality and around whether shrinking Alberta's revenue at a time of tight fiscal constraints makes sense, no policy choice is without tradeoffs. And the evidence suggests lower corporate rates does indeed boost wages.

Recent research by my University of Calgary colleague Dr. Ken McKenzie and with University of Alberta economist Dr. Ergete Ferede, for example, finds strong evidence that provincial corporate tax changes affect wages. The intuition is simple: taxes affect investment, as more marginal business projects become worthwhile. And rising investment leads to higher activity and demand for workers, which then leads to higher wages and, potentially, employment.

It's hard to be precise, but taking their estimates at face value, the long-run effect of the corporate tax cut from 12 to 8 per cent might be 1.6 per cent higher wages in Alberta. For the average worker, that's nearly $19 extra per week (or nearly $1,000 per year).

Of course, there are other measures to consider. We can help ensure workers have the skills they need to succeed at other jobs outside of oil and gas. Higher skills means higher productivity, and higher productivity means higher wages. Workers making the shift from oil and gas, construction, and certain manufacturing jobs to other activities also need support and retraining opportunities.

With hours worked and overtime back to normal levels, there's a limit to how much earnings growth we should expect. But with Alberta's adjustment to the oil price shock appearing complete, normal wage growth may soon return — though from our new, lower level.