Making cents of wages
Ever wonder how your wages are determined?
You’re not the only one who cares about your wages. At the Bank of Canada, we care about them a lot too.
Your wages affect both your standard of living and the bottom line of the company you work for.
Across the economy, wages affect
So, it makes sense that we, as a central bank, care about your wages. Wages affect inflation, and inflation is at the heart of monetary policy.
When companies decide how much to pay you, they keep a few things in mind.
That price must at least cover the cost of making a product or delivering a service. Higher prices generally mean companies can pay higher wages.
The output you can produce in a certain amount of time—we call this labour productivity.1 More productive workers tend to earn higher wages.
Many factors affect your labour productivity:
Improvements in technology help increase productivity but don’t always benefit everyone. Some people’s jobs are disrupted by these advances in technology. But overall, gains from better technologies help increase Canadians’ living standards.
When the economy is doing well, more companies compete for workers. This increased competition for workers tends to result in higher wages.
Like companies, you keep a few things in mind when you decide on the wage you’re willing to accept.
You’re more likely to ask for a higher wage when you
For example, if more people are looking for the same job as you, the wage for that type of work will be pushed down. The most important factor affecting the number of people looking for work is how fast the working-age population grows.
Some interesting facts about the labour market can be explained by the way supply and demand interact:
These basics provide a foundation to help you understand how wages are determined. But other factors need to be kept in mind. One important factor in the real world that goes beyond the basics is the potential for exceptional labour market power to affect wages.
Labour market power basically means how much influence companies or workers have over wages. Since both can have some degree of market power, let’s talk about how this matters for wages.
Companies have market power when labour demand is concentrated—for instance, when there are only a few major employers in a specific region or looking for a given skill set. The result: less competition for your labour. This lack of competition can result in lower wages.
You may even have noticed that your employer added a “non-compete” or “no-poaching” clause in your contract. That’s another way companies can exercise their market power—by limiting your opportunities with other companies.
Workers can have market power, too. For example, if you have a highly specialized skill set, you can demand a higher wage.
Unions can also help increase workers’ market power by improving the collective information and bargaining power workers have during negotiations with companies. This raises wages.
Some factors lower the market power of workers.
One example is globalization. It leads to higher productivity and income for Canadians overall. But this also means some of us are now often competing for jobs with people in other countries, lowering the labour market power and wages of some workers.
So, as you can see, lots of factors go into determining wages. Understanding these factors pays off—for you, companies and us here at the Bank of Canada.