Backgrounder on the Business Outlook Survey question on firms’ average expected wage increase

Firms participating in the Business Outlook Survey (BOS) are asked several questions about labour markets. One such question is whether they expect wage growth to increase or decrease over the next 12 months. The responses to this question, combined with related confidential comments, give a picture of the state of wage pressures in the economy. This, along with wage data and several labour market indicators, inform the Bank about labour market conditions.

Since the 2006 fourth-quarter survey, respondents have also been asked to estimate what they expect their firm’s average wage increase—across all employees—to be in the next year, expressed as a percentage change. This is referred to as the average expected wage increase. This document describes the main characteristics of this question and how the responses are aggregated. It also examines the correlations between these aggregated responses and measures of wage growth.

When asked about their expected wage increase, firms are directed to:

  • exclude the effects of special incentives like one-off bonuses and non-wage forms of compensation
  • disregard any changes in the composition of their workforce
  • include the effects of any policies that support wages, such as minimum wage legislation and the Canada Emergency Wage Subsidy

Summary historical statistics for individual firms’ responses to this question are presented in Table 1.

Table 1: Summary statistics over the history of the average expected wage increase Pooled sample, 2006Q4 to 2022Q1 (%)
Mean3.0Standard deviation2.7
Median2.5Maximum40.0
Mode2.0Minimum-35.0

Source: Bank of Canada calculations

To assess how informative the responses to this question are about wage pressures in Canada, we compare the average expected wage increase from the BOS with two wage growth measures that are based on data from Statistics Canada.

  • First, we use the wage-common, a measure of underlying wage pressures that combines data from several sources on wage growth.
  • Second, we use a fixed-weight measure of wage growth from Statistics Canada's Labour Force Survey (LFS). This measure keeps the composition of the labour market stable over time.

Table 2 shows the results. It covers the period from when the question was first introduced until the fourth quarter of 2019—before the start of the COVID‑19 pandemic. The strongest correlations for the BOS average expected wage increase are with the wage-common for the same quarter (t) and with the fixed-weight LFS four quarters ahead (t + 4). The pandemic has affected correlations between the average expected wage increase and the wage-common largely because of significant shifts in the composition of the workforce. The strength of the correlation with the fixed-weight LFS measure of wages has remained mostly stable.

Table 2: Correlations between the average expected wage increase and measures of year-over-year wage growth From 2006Q4 to 2019Q4
BOS series at time tWage growth measuret - 2t - 1tt + 1t + 2t + 3t + 4
BOS average expected wage increaseLFS fixed-weight (%)-0.100.090.200.340.570.690.76
Wage-common (%)0.530.690.730.680.630.500.41

Note: Peak correlations are in bold type. BOS is the Business Outlook Survey. LFS is the Labour Force Survey from Statistics Canada. Wage-common is a composite measure of year-over-year wage growth.
Source: Bank of Canada calculations

Chart 1 shows that the path of the average expected wage increase generally mirrors that of other measures of wage growth. But the level of the average expected wage increase tends to stay above the other measures in most quarters. This may be partly because the average can be affected by outliers—values reported by a few firms that are significantly different than those of other businesses. This is particularly the case for firms reporting abnormally high wage increases.

Note: LFS is Statistics Canada’s Labour Force Survey.
Sources: Statistics Canada and Bank of Canada calculations