Wages in Canada are rising. Will inflation, interest rates follow? – National

Signs of rising wages may be just the balm some Canadians need to offset the scorching hot inflation.

But just as income earners could be poised to catch up after years of pandemic wage arrears, economists say fears of rising wages fueling rising prices could lead to swift action by the Bank of Canada to stifle growth. before it happens.

Experts warn that interest rates may need to rise higher or faster to ensure rising labor costs aren’t passed on to consumers in an endless inflation cycle.

Friday’s job numbers show that, as economists expect, wages grew faster, with average hourly wages rising 5.2 percent year-over-year to $31.24, compared with a 3.9 percent annual increase in May. , according to Statistics Canada.

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Compared to pre-pandemic wage growth, June recorded the fastest growth since comparable data was collected in 1998. However, wage growth in June was still below the most recent inflation rate of 7.7 percent reported in May.

The Canadian Federation of Independent Business (CFIB) noted in its most recent Business Barometer report at the end of June that employers are expected to increase wages by 3.7 percent over the next year — the highest annual level recorded by the CFIB.

Why are wages rising now?

Brendon Bernard, senior economist at job site Indeed Canada, says the conditions are ripe for employees to earn higher wages, either at their current employer or by switching jobs.

In an interview with Global News, he points to the ‘tightness’ of the job market, with low unemployment and a significant number of job openings, putting workers in the driver’s seat when it comes to pursuing opportunities.

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Employers are more likely to pay more to attract candidates and retain the staff they have, Bernard explains.

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He notes that posts on Indeed show that more employers are even citing pre-signup bonuses and other hiring incentives as a way to attract job seekers to their company — a strategy he says is usually reserved for negotiation with a preferred candidate.

“As the job market becomes more competitive, the pressure on employers to raise wages to attract job seekers is increasing,” says Bernard.

Click to play video: 'Breaking the record tight labor market in Canada'

Breaking Canada’s Record Tight Labor Market

Breaking the record tight labor market in Canada – May 12, 2022

The rising cost of living itself is a factor driving companies to raise workers’ wages, according to the Bank of Canada’s Business Outlook Survey released Monday.

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The Business Outlook Survey shows that inflation and work pressure are driving up wages in Canada.

Bank of Canada

The erosion of affordability at gas stations and supermarkets is also forcing workers to raise their wages.

David Macdonald, senior economist at the Canadian Center for Policy Alternatives, says workers’ wages have not kept pace with inflation during the pandemic.

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He wrote a report in April showing that worker wage growth has been well below the average inflation rate of 3.4 percent for the past two years, especially in the public sector, education and health care.

So while wages may have risen adjusted for inflation, workers face real wage losses over the course of the pandemic, he concluded.

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Inflation is now well above that average, reaching 7.7 percent at the last national reading in May, boosting wages more than ever to meet demand.

“Workers are way behind inflation,” Macdonald said in an interview with Global News.

“They will see significant real wage losses this year because it will be quite difficult to find workers who will see an eight percent pay increase this year alone. And that’s what you need to keep up with inflation.”

What does this mean for inflation?

Doug Porter, chief economist at the Bank of Montreal, sounded the alarm in a recent note to clients on wage and employment data that, “after a long period of surprising calm for Canadian wages, the wage survey just fired a shot across the inflation arc.”

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Higher wages can indeed contribute to inflation itself, Bernard explains.

“Wages are important when it comes to tracking the cost of living. But there are potential spillovers on prices and the cost of living itself,” he says.

When companies raise wages to retain and attract workers, those higher labor costs often drive up the cost of goods and services, Bernard says. If left unchecked, the Canadian economy could find itself in a cycle of rising wages that never quite keep pace with rising prices.

Click to play video: 'Living with inflation'

Living with inflation

Living with inflation – June 29, 2022

Indeed, respondents to the Bank of Canada’s Business Outlook Survey indicated that they intended to pass on to consumers costs, partly caused by rising wages. CFIB members said they expect their average prices to rise 4.8 percent over the next year, according to the June Business Barometer.

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Bernard notes, however, that this probably hasn’t been the main fuel for Canada’s current inflation episode. Global factors such as the war in Ukraine have a major impact on supply and affect domestic prices more than the early rumble of wage growth.

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But higher wages also put pressure on the demand side of the inflation equation.

Some key inflation inputs, such as rent, tend to rise in tandem with wages, Bernard says. And when Canadian incomes rise, households are more likely to spend and consume — the exact behavior the Bank of Canada is trying to avoid by raising interest rates and dampening the economy.

For that reason, Bernard says the central bank may have reason to push wages.

“Wage growth may not be the main driver of inflation today, but it could become more important tomorrow,” he says.

What will the Bank of Canada do?

Many economists believe the Bank of Canada will raise its benchmark rate by 75 basis points in its next decision on July 13.

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Canada’s central bank is expected to follow in the footsteps of the US Federal Reserve, which made such a hike last month, as central banks around the world try to curb inflation.

Macdonald says the Bank of Canada will have little leeway to avoid slowing wage growth as it appears to be taming inflation.

“The Bank of Canada is a one-trick pony and the trick is the interest,” he says.

“That’s one of the big challenges with using interest rate policy is that it’s going to be a very blunt instrument and a blunt instrument that will drive down wages. Well, what it will likely do is it will not allow workers to raise their wages to catch up with inflation.”

Click to play video: 'Government Policy and Inflation in Canada'

Government Policy and Inflation in Canada

Government Policy and Inflation in Canada – June 30, 2022

However, Macdonald argues that this may not be the only tactic for reducing inflation as wages rise.

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Because companies expect wages to rise in the tight labor market, he says companies often raise prices before raising staff.

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The result, he says, is a pandemic recovery, driven by corporate profits, not worker wages. Canada’s corporate profit-to-GDP ratio during the latest recovery from the recession was the highest in the past 50 years, according to an analysis by the CCPA.

Rather than put the responsibility on the Bank of Canada to deal with rising prices with the “blunt instrument” of interest rates, Macdonald says governments can take action to regulate “price inflating” companies that are allowed to operate with minimal competition. or broad price control powers, such as supermarkets or oil and gas companies.

If federal and provincial governments don’t make regulatory changes to bring prices under control in Canada — instead slowly handing over the responsibility for inflation to the Bank of Canada — Canadian workers will suffer from permanently lower wages and significant job losses. , says McDonald.

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“There are quite a few things governments can do to … contain inflation. And they should be doing those things now,” he says.

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“Otherwise, the bank will do what it does, which is raise interest rates until we have a recession.”

With files from the Canadian Press

© 2022 Global News, a division of Corus Entertainment Inc.

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