Strategy

Prediction: You make less money

With inflation eating up your measly wage gains, you'll have less cash in your pocket.

It should come as no surprise to any household tracking its finances that 2011 was a terrible year for wage growth. Chances are, you’re not any wealthier now than at this time last year. Unfortunately, 2012 is not looking better. In fact, there is a strong possibility you’ll be making less.

Wage growth started strongly in 2011, running 2.5% higher during the first few months than the same period in 2010. But as the economy slowed and troubles deepened in Europe,

What it means to you:

Expect to have less of an income cushion to rely on in emergencies—making saving now all the more crucial.

growth stalled. By November, average weekly earnings rose only 1.1% on a year-over-year basis—the smallest increase since November 2009. Inflation, meanwhile, was running at 3% due to a spike in energy prices and food costs. That means that by year-end, wages were falling in real terms.

The biggest contributors to the grim wage picture are the weak Canadian economy and uncertainty abroad. A survey by HR consultants at Aon Hewitt found that Canadian employers project average salary increases of 3.1% in 2012, but the survey was conducted mid-year before the economy started to lose steam. Businesses will be reluctant to raise pay and grant new hires fat salaries when the world is at risk of slipping into another recession. Workers, meanwhile, hesitate to ask for raises in this environment. “These trends are not only going to continue, but accelerate,” says Armine Yalnizyan, an economist with the Canadian Centre for Policy Alternatives.

The wide variety of economic dangers in 2012—from a housing correction to an overheated China—will keep employers wary. The erosion of unions’ power will also suppress wages gains. At best, wages will keep pace with the cost of living. Many economists are forecasting that inflation will ease. Craig Alexander, chief economist at TD Bank Financial Group, for one, expects inflation to average 1.7% in 2012, largely because of more stable energy prices. Wage gains are projected to just exceed that amount, at 2%.

With such a narrow margin between the two, households will feel squeezed. Saving will be difficult, and Canadians will have less spare cash to spend on consumer goods. That’s ultimately harmful for the country as a whole. Our consumption-based economy starts to break down if we sink deeper into debt and don’t spend. So ask for that raise this year—for the good of the economy.