October 25, 2017 / 2:05 PM / a year ago

Inflation pressures from wages still muted despite job gains: Bank of Canada

OTTAWA, Oct 25 (Reuters) - There are still signs of Canadian labor market slack despite strong job gains over the past year, though wage growth could accelerate if employment shortages become more pervasive, the Bank of Canada said on Wednesday.

Various measures of wage growth remain below their historical averages, while average hours worked are still below trend, the central bank said in its Monetary Policy Report released as it held interest rates at 1 percent.

Weak wage growth in the face of solid job creation has been seen in many developed nations since the financial crisis, posing a quandary for policymakers.

In Canada, labor cost pressures are growing at a moderate pace and are below what would be expected at this stage of the economic cycle, which means inflation pressures from wages also remain muted, the central bank said.

Globalization is one factor that could explain the lack of wage pressures, the bank said, with the risk of companies relocating to low-wage countries potentially reducing workers’ bargaining power.

While the drag from weak labor productivity in 2015 as the economy was hit by the drop in oil prices has dissipated, other factors could be at play, such as formerly high paid energy sector workers moving to lower paying sectors.

Still, wage growth is forecast to increase as past labor market slack fades, while strong productivity growth could also give wages a boost.

“Wage growth could potentially accelerate if labor shortages were to become more pervasive since, historically, strong wage growth has been associated with significant excess demand in the labor market,” the report said.

Recently announced increases to the minimum wage in the provinces of Ontario and Alberta could have a higher impact on younger workers, though they will likely only have a small positive impact on national wages.

The Bank of Canada also explored some potential explanations for why inflation has been soft in recent years, another phenomenon that has puzzled other central banks including the U.S. Federal Reserve.

The central bank found globalization is likely not contributing significantly to weak inflation in Canada, though it could become more relevant over time given Canada’s integration into global value chains.

While there is also some evidence that gains in technology and digitalization has dampened inflation in advanced economies, the effect in Canada appears to be small, partly due to a relatively low adoption rate of e-commerce and other digital technologies, the bank said.

(Reporting by Leah Schnurr, editing by Andrea Hopkins)

leah.schnurr@tr.com; +1 613 788 8203

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