Oil, Wages, and Public Expenditures in Oil-Producing Regions - Lesson from Alberta

Abstract

We examine the impact of oil-price shocks, macroeconomic factors and pipeline bottlenecks on the evolution of wages in Alberta’s oil and gas sector. The aim is to understand how wage-movements are affected by economic cycles in Alberta – an oil-exporting region – to provide policy prescriptions to the industry and public sector. To our knowledge, our paper is the first to examine the impact of oil-price and macroeconomic changes, market access, and inter-sectorial effects on wage changes in Alberta’s oil and gas sector. We find evidence that suggests that competition for scarce labour among oil and gas firms, construction firms and the public sector is an important aspect underlying the evolution of wages in the oil and gas industry. Other important determinants of wage movement in the industry are unemployment rates in oil and gas and construction sectors and the yields of the US Treasury bonds. We also find that the West Texas intermediate (WTI) oil-price is a crucial determinant of the key explanatory variables in the model. We use actual and future WTI prices to simulate wages in Alberta’s oil and gas industry. Our analysis yields two policy prescriptions. Labour costs can be reduced with geographic labour-market segmentation. In addition, government counter-cyclical expansionary infrastructure policies can reduce labour costs and smooth the impact of oil-price fluctuations.

Keywords: Alberta, oil, construction, public expenditure, wages