Aging may boost wages: Bank of Canada

With fewer people in workforce, competition for talent may drive wages up
By Claire Sibonney
||Last Updated: 04/12/2012

(Reuters) — The aging of Canada's population will put upward pressure on wages as the pool of available workers shrinks, and global aging might over time lead to lower interest rates, said Jean Boivin, deputy governor of the Bank of Canada.  

Aging will also affect the potential of the economy, meaning the level of activity at which it can operate without inflationary pressures, and this is something the Bank of Canada needs to assess, he said.

The high level of household debt in the country makes it even more crucial that individuals adjust their savings behaviour and plan over a longer horizon, he said in a speech in Toronto.

"As our society ages, we can either accept a lower standard of living or we can try to be proactive and adjust... The stakes are high and we cannot afford to ignore them," Boivin said. "There is no free lunch in that context; something will have to give and someone will have to pick up the tab, so the least we can do is accept this fact and ensure that the bill remains small and that the burden is shared fairly."

The mechanism for upward pressure on wages would be that with relatively fewer people left in the workforce, employers will compete to attract talent.

Taken in isolation, he said, the scarcity of labour relative to capital could be expected to lead to higher wages and lower returns on capital in advanced economies, and eventually to persistently lower global interest rates.

Improved productivity, if any, would offset the downward pressure on rates.

But Canada's tepid growth of productivity and potential output has preoccupied the central bank. Boivin said the latest estimate was for Canada's potential output to grow by 2.2 per cent in 2014, and without the decline in working age population it would be 0.2 percentage points higher.

"Aging is projected to continue to subtract from potential output growth until the end of the current decade," he said.

He said Canada faced three options to avoid drastic declines in living standards or shifting too much burden on the next generations: more work, greater productivity and higher savings.

Without endorsing the recent federal budget, he said policy steps could foster the needed adjustments and this was the objective of some of the measures in the budget.

The budget raised to 67 from 65 the age of eligibility for payments to seniors under its Old Age Security (OAS) program, and hiked the age of retirement to 65 from 60 for new federal employees, starting next year.

Boivin also highlighted the important contribution of immigration to dealing with the aging problem. The budget announced plans to eliminate a backlog of stale applications by foreign skilled workers so that immigrants whose skills are in greater current demand can enter Canada faster.

He said a key challenge was to remove the barriers that keep educated and skilled immigrants from working in their fields.

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