Economists: Canada may face a wage spiral

As more workers demand higher wages amid sky-high inflation, economists debate whether Canada is facing a wage-price spiral.

According to one economist, as more and more workers are demanding higher salaries amid 40 years of high inflation, there are signs that a wage-price spiral is emerging.

“I think we’re getting some signals that we’re moving in that direction. I think we’ve avoided one so far, but let’s be honest, we’ve had above-target inflation for 18 months,” Warren Lovely said, a managing director of economics and strategy at National Bank Financial Markets.

“After enough time has passed, when inflation has been so high for so long, it is not unreasonable for workers to demand cost-of-living adjustments and higher wages.”

A new survey by consulting firm Eckler Ltd. revealed that Canadian employers expect the national average base salary to rise 4.2 percent this year, the highest in two decades. The survey, conducted between July and August and surveying 269 Canadian companies across sectors, found the results are similar to base salary increases in 2022.

“I think what we’re seeing more and more evidence in these polls, and indeed in some of the collective bargaining agreements that we’re seeing, is a little more embedding of higher wage increases, which could make the inflation problem more intractable,” Lovely said.

The Bank of Canada is trying to avoid a wage-price spiral in which higher wages and inflation constantly influence each other.

Bank of Canada Governor Tiff Macklem warned business owners in July.

“My only advice is that the high inflation we are seeing today will not last. So if you’re on longer-term contracts, don’t expect inflation to stay where it is now. You should expect it to fall,” Macklem said at a Canadian Federation of Independent Business event at the time.

Lovely said the central bank was “desperate” to prevent a wage-price spiral from starting, as it would require an even tougher monetary policy response, leading to greater damage to the economy.

As the conditions for stronger wage growth, such as B. runaway inflation and persistent labor shortages, not all economists are convinced that the country is headed for such a spiral.

“If I look at where inflation has been really strong and picked up lately, I don’t think that at least the history of inflation so far has been mostly about a wage-price spiral. So many of the factors driving inflation are quite global in nature,” Brendon Bernard, senior economist at job search site Indeed.com, said by phone.

He acknowledged a spiral could be developing, but added that rapid rate hikes by the Bank of Canada could “short-circuit” the process.

The Eckler survey also showed that wage increases are the most important way employers plan to attract and retain talent in a tight job market.

The urge for productivity
Higher wages could also be the last nudge employers need to accelerate their adoption of machinery and technology where they traditionally rely heavily on labor for productivity, the economists said.

Hiring challenges can impact business productivity in a number of ways, including implementing more automation or the need to hire less experienced workers and train them on the job, according to Bernard.

A Statistics Canada study released in July 2022 found that companies facing labor shortages are nine percent more likely to plan to adopt new or additional digital technologies.

“Recently, productivity data leaves a lot to be desired. Now we’re at a stage where there really doesn’t seem to be much available labor to put into the economy to meet that marginal sale or demand,” Lovely said.

“And if we start to see more sustained wage pressures as labor gets more expensive, the only thing that could reasonably be expected would be that firms could shift their focus, and that could provide the incentive for firms to move into that other factor.” invest production: machinery and equipment. And that could eventually lead to some productivity improvements.”

A chain reaction
According to Craig Alexander, chief economist at Deloitte Canada, an arm of the global accounting and services giant, the reason economists fear a wage price spiral is because of the compounding effect — because companies pass on the rising cost of wages to their customers in higher prices.

Something like a nuclear chain reaction, the spiral happens when those higher prices spur more wage demands that lead to even higher prices in an endless cycle.

“If businesses respond to higher wage demands by simply paying their workers more and then increasing their sticker prices to consumers, well then it’s going to be very hard for us to get out of this inflation environment,” Alexander said. “And central banks will feel the need to raise interest rates by even more.”

He said Deloitte is trying to convince employers to consider other options.

Part of the article was reported by Yahoo Finance.