ANALYSIS | People are angry over the cost of living. It could push wages ever higher | CBC News

A new surge of job action by Canadian employees may stand in the way of Bank of Canada governor Tiff Macklem’s plan to get inflation down to his two per cent target.

In the past week, more than 155,000 federal public servants in two unions have voted in support of strike mandates. 

Speaking to reporters at Wednesday’s monetary policy press conference, where the Bank of Canada once again held interest rates steady at 4.5 per cent, Macklem reiterated his expectations that inflation would fall to three percent this year and roll back to two percent in 2024.

But some economists say that worker anger over their shrinking spending power may mean higher wage demands, not just during current labour disputes, but in years to come.

Easing labour tightness?

Asked repeatedly by reporters about the effect of recent strike votes, Macklem repeatedly answered that he was not interested in getting into the middle of labour negotiations.

But as wage increases have crept above the current level of inflation, he said they would have to moderate — and there were signs that was happening.

“We need to see some easing in the labour market to take out those wage and price pressures and bring inflation back to target,” said Macklem. “Companies are using the temporary foreign worker program more. That is probably helping ease this tightness in the labour market.”

Macklem also repeated the idea expressed by some other critics that rising wages were not justified by current increases in productivity, roughly defined as the amount of economic growth per unit of input.

“Wage growth has been running at four to five per cent and unless there’s a surprising acceleration in productivity, that’s not consistent with two per cent inflation,” said Macklem.

Education workers picketting in Nova Scotia last year. Economists say new rounds of wage negotiations in 2023 and 2024 to catch up with inflation could themselves contribute to inflation. (Jane Sponagle/CBC)

For workers who have watched their spending power shrink as profits and prices rise, the productivity argument is a red herring. 

“Why should workers have to work harder just to keep the purchasing power they already have?” asked Kaylie Tiessen, an economist with Unifor, Canada’s largest private sector union.

“The Bank of Canada continues to point to wage increases as a culprit in inflation when in fact what we’re seeing is profiteering and supply-chain bottlenecks are the real culprit.”

This week’s monetary policy outlook did note the effects of rising corporate prices and insisted they would have to moderate as well.

But it’s not at all clear that the recent explosion in prices and profits can be justified by increased productivity any more than wage increases can.

Labour losing out

Some economists in the past have noted that slow, creeping inflation, where prices rise only slightly faster than wages, help make middle class Canadians poorer over the long term.

But the sudden expanding gap between prices and wages, with groceries rising at 10 and 11 per cent while many wages were stuck at between one and two per cent, may mean working people have been startled out of their complacency.

“The share of GDP that labour is taking home compared to the share of GDP that capital is taking home — the gap is increasing and has increased over time,” said Tiessen. “Workers are not taking home as much of what is produced in Canada and that leads to higher inequality and leads to a number of negative economic effects as well.”

In the late 1970s, for example, wages and salaries were about half of GDP, but Statistics Canada data shows the share going to labour has fallen since then.

She pointed out the obvious economic principle that workers who have less to spend cannot contribute as much spending to business income and profits.

But the idea that wages need to catch up to the recent surge in inflation is not just a labour union point of view.

Scotiabank economist René Lalonde actually predicted this would happen about a year ago in a report titled Wages to Lag Inflation and Productivity Growth in 2022, Catch-up in 2023 where he described a “negative wage gap” of about three per cent.

‘Rigidities’ keep wages from rising

Essentially what Lalonde observed and what he confirmed in an interview this week was that when prices began to surge as inflation peaked, worker spending power dropped sharply. Some could individually ask their bosses for a raise, but many who bargained as a group were trapped in contracts where annual wage increases were a small fraction of rising prices.

“Wages react with rigidities,” said Lalonde, describing the effect of many workers locked into contracts. “And since not all the contracts in the economy are renegotiated at the same time it is kind of a rolling [effect].” 

So not only will some wages outpace inflation this year, that process will continue as each new contract takes previous inflation into account. Not only that, he said, but with specialized skills in short supply, scarcity value could also push wages higher. Low-wage temporary foreign workers may not solve that problem.

And he says that previous evidence has shown that prices and wages do tend to get back into sync eventually. For that reason, Lalonde think’s Macklem’s estimates for inflation are too low.

Someone shops in a market's meat section.
The Bank of Canada says a tight labour market and companies that keep passing on costs to consumers who have become accustomed to inflation could mean higher rates for longer. (Patrick Doyle/Reuters)

“Since wages will move faster than inflation, it will actually contribute to inflation,” said Lalonde. “That is why we are expecting inflation of around four per cent in 2023, which is above most of the forecasters and above the Bank of Canada.”

At Wednesday’s news conference, Macklem insisted that labour negotiators should plan for inflation to hit the Bank of Canada’s two per cent target by next year. But, past optimistic forecasts make it hard to know whether the prediction is at least partly cheerleading in favour of lower inflation.

Faced with many experts foreseeing sticky inflation that will remain higher than the target, Macklem admitted the biggest risk to the bank’s forecast is rising prices in the service sector and a tight labour market, combined with high inflation expectations among the public.

“Service price inflation could be stickier than projected if the labour market remains tight and companies believe they can continue to pass on higher costs without restraint because consumers expect higher inflation,” he said. In that case, he said, he may have to hike again or keep rates higher for longer.

But Macklem said the other big risk to the Bank of Canada’s inflation outlook is a “severe global slowdown” where a stressed banking system leads to renewed pain for borrowers, pushing unemployment sharply higher. If that happens, workers hoping to make up for inflation-era losses will likely find negotiations even tougher than they are now.

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