The changing nature of employees’ compensation and employers’ labour costs

Canadian wage data can be confusing. Much attention is paid, pardon the pun, to data releases from the Labour Force Survey (LFS) and the Survey of Employment, Payrolls and Hours (SEPH). The former is a survey of households; the latter is a survey of businesses. Both attract attention because they are produced monthly with a short lag. However, while timely, they tend to give an incomplete and misleading view on trends in workers’ total earnings, especially over longer horizons.One trend that becomes clear when looking at total earnings is that over the past three decades Canadian workers have received an increasing share of their total salary as benefits. Employer-paid benefits include health, dental, maternity, disability and life insurance coverage as well as employer contributions to public and private pension schemes, employment insurance and workers’ compensation schemes. While it is true that workers can usually only access their benefits after some event or specific date (e.g. maternity, illness, injury, unemployment, retirement or death), these benefits must nonetheless be paid or provisioned for and are therefore a labour cost paid by employers.A longer discussion of these issues can be found in our research paper, Productivity and Pay in Canada: Growing Together, Only Slower than Ever. The latter was the lead article in the Spring 2021 edition of the International Productivity Monitor, a peer-reviewed journal published by Canada's Centre for the Study of Living Standards and the Productivity Institute of the United Kingdom. A short, non-technical summary of the paper is also available here.

A quick refresher on Canadian wage data sources and their scope

Since all labour inputs contribute to labour productivity and GDP, it is important that earnings data be comprehensive when looking at long-run wage trends. Table 1 below provides an overview of Canadian wage data produced by Statistics Canada and explains their scope. National Accounts (NA) wage data is much more comprehensive than LFS or SEPH data because NA wage data include all forms of labour compensation paid by firms (including money wages and benefits paid by employers) and covers all Canadian industries (including the business and non-business sectors). The only downside is that NA compensation data is for employee earnings only. The Productivity Accounts (PA) are even better. They provide the most comprehensive source of earnings data by including earnings from all types of work, including both employees and (the labour income of) self-employed workers.

Table 1

How do businesses pay employees?

Employers pay workers to apply their skills and time to the production process. Remuneration of workers could be direct, in the form of money wages, or indirect, in the form of supplementary labour income or benefits. Many employers, especially large ones, offer their workers a suite of benefits as part of their total compensation package.Statistics Canada defines employees’ pay as follows:[The System of National Accounts] SNA 2008 defines compensation of employees as “the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period”. The word ‘total’ deserves emphasis. Compensation of employees includes not just regular paycheques, but also cost of living allowances, overtime pay, hazard pay, expatriation allowances, holiday pay, tips, commissions, bonuses, retroactive pay, stock options, directors’ fees, compensation in kind such as automobile allowances, board and lodging and gifts, pension benefits, health insurance benefits, other insurance benefits and various other types of compensation. It is the largest component of income-based GDP, accounting for over half. In broad terms compensation of employees consists of two components. One is wages and salaries by which is meant, essentially, the paycheques and all other forms of direct compensation of employees. The other is employers’ social contributions [also known as supplementary labour income, SLI] which refers to the actual or imputed contributions that employers make on behalf of their employees to both government-sponsored social security schemes—in Canada, these include the Employment Insurance program, the Canada and Quebec Pension Plans and provincial and territorial government workers’ compensation plans—and employer-sponsored health and disability insurance, pensions, maternity, dental, life insurance and other benefit schemes.

Example: Expanding the Canada Pension Plan

From 1966 to 1986, employers and employees were each required to contribute to the Canada Pension Plan (CPP) the equivalent of 1.8% of an employees’ income up to the maximum annual pensionable earnings. From 1987, the employer contribution rate, along with the employee contribution rate, was gradually increased to 4.95% by 2003, where it remained steady for many years. In 2018, the CPP was expanded, and the contribution rate has been gradually increased. For 2021, it is 5.45% of an employee’s maximum annual pensionable earnings.What does this mean in dollar terms? In inflation-adjusted 2019 dollars, the maximum annual employer contribution increased from $615 in 1966 to $2,748.90 in 2019. That is a 347% inflation-adjusted total increase in employers’ contributions, which equates to a compound average growth rate (CAGR) of around 2.8% per annum – well in excess of labour productivity growth over the same period.

The changing nature of employees’ total compensation

Supplementary labour income (SLI) includes employers’ contributions to group or private pension plans, health, dental and life insurance policies, and employer contributions to government plans such as the Canada Pension Plan, Quebec Pension Plan, employment insurance, and workers’ compensation insurance. Figure 1shows that these employer-paid benefits have increased from around 9% of employees’ total salary in the 1980s to around 14% in 2019. Conversely, the share of total salary paid as cash wages has decreased from around 91% in the 1980s to around 86% in 2019. Note that these figures are from the National Accounts. Any discussion of long-term trends in nominal wage growth based on LFS or SEPH data will understate total wage growth by excluding the rising proportion of employees’ total salary paid as SLI.

Figure 1

Conclusion

It’s important to exercise caution when looking at trends in nominal wage growth. The Productivity Accounts provide the only fully comprehensive source of labour compensation data and are especially useful for long run analyses. The National Accounts provide comprehensive data on employee total labour compensation (excluding self-employed workers). Meanwhile, LFS and SEPH wage data are timely but far less comprehensive and are therefore less useful in trying to understand long run trends in total worker pay.