Dave Darnley, welder, uses a plasma torch to cut through this three foot diameter pipe at the PCL Fabrication Facility in Nisku, Alberta in this file photo.Ian Jackson/The Globe and Mail
Balance, harmony, equilibrium – all are wonderful to behold, but often tricky to achieve. Economists know this all too well. Even if an economy appears to be growing and in balance, there's always the danger of it being knocked flat on its back.
Alberta is a great example. It's gone from being the hottest economy on the continent to one suddenly in reverse. The last five years of strong growth have given the illusion of balance, but there were serious imbalances developing—particularly in the labour market.
In the 10 years between July of 2005 and July, 2015, average weekly earnings in Canada increased 30 per cent. But in Alberta, average weekly earnings shot up 46 per cent. Already a decade ago, Albertans were the best-paid employees in the country (excluding the territories, where earnings are significantly higher). In July, 2005, the average worker in Alberta brought home $776 a week, before taxes. In July of this year, Albertans were still the best paid with weekly earnings of $1,140.
The gap between Albertans' incomes and those of everyone else, however, has been the real shocker. Ten years ago they earned about 6 per cent more than the Canadian average. That gap has now rocketed to 19 per cent.
When Albertans read these numbers, they'll be doing some quick math in their heads to calculate how their own wages have increased. For many of them, it will be nowhere close to a 46-per-cent jump. That's the problem with the mathematical average: many will be below that, but many will also be well above.
And which industry in Alberta has seen employee earnings increase by more that 46 per cent in 10 years? It will come as no surprise. Weekly earnings in Alberta's petroleum sector increased to $2,117 in July, 2015, from $1,278 in July, 2005 – dramatic 66-per-cent increase.
It doesn't require a Nobel Prize in economics to determine the problem currently pummelling Alberta's oil producers. Labour costs – which account for roughly 70 per cent of total operating expenses in the industry—have skyrocketed. Wages in Canada's best-paying industry have increased at more than twice the national average, and at $45 (U.S.) for a barrel of West Texas intermediate oil, the economics of the industry don't work.
The temptation is to lay the blame at the feet of oil and gas companies. After all, they've been the ones throwing outrageous salaries, bonuses and overtime premiums at their employees. But this blame game is misguided. It wasn't imprudent to offer generous compensation – it was simply necessary to get the labour in place to get projects off the ground. Skilled labour was scarce and the market was extremely competitive. When oil was at $107 a barrel, the $2,000 weekly wage seemed to make sense.
Average earnings are now starting to ratchet downwards in Alberta. As of July, earnings in the province have posted six consecutive declines month over month. And compared with a year ago, earnings are down 1.2 per cent. It is the only province where earnings are lower than a year ago.
Even more, the drop in earnings as reported in Statistics Canada's monthly survey captures only current employees. So if you've been laid off, your weekly earnings fall to zero dollars, but if you're no longer an employee, you're not captured in the data. That means the reported 1.2-per-cent drop in average earnings greatly is probably too optimistic. The true drop could be closer to 3 or 5 per cent.
This rebalancing of labour costs is healthy, but it comes with obvious challenges as well. Lower household earnings will strain retailers, residential housing, restaurants and other sectors dependent on consumer spending. And this will weigh on Alberta's macro-economy this year and next.
But as is often the case, someone's pain is another one's gain. The job losses and shrinking paycheques in the petroleum sector have provided a windfall of labour in competing sectors. Employment in Alberta's forestry, transportation, warehousing, distribution and logistics industries are up from a year ago—and they aren't having to back up the money truck to get the workers. A more balanced economy can only be a good thing.
Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.