Wages in Canada are rising. Will they follow inflation, interest rates? – National | Globalnews.ca

Signs that wages are rising could be the balm some Canadians need to offset soaring inflation.

But just as earnings may be ready to catch up after years of pandemic wage lags, economists say fears that rising wages will spread rising prices could prompt swift action from the Bank of Canada. to stifle growth before it happens.

Experts warn that interest rates may need to rise more or more quickly to ensure that rising labor costs are not passed on to consumers in an endless inflationary cycle.

Friday’s employment figures show that, as economists expected, wages grew at a faster pace, with an average 5.2 percent rise in hourly wages to $31.24 year over year compared with an increase annual rate of 3.9 percent in May, according to Statistics Canada.

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

The Canadian Federation of Independent Businesses (CFIB), for its part, reported 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.

Brendon Bernard, a senior economist at job search site Indeed Canada, says the conditions are ripe for employees to earn higher wages, whether from their current employer or changing jobs.

In an interview with Global News, he points out that the “tightness” of the labor market, with a low unemployment rate and a considerable number of vacancies, puts workers in the driver’s seat when it comes to seeking opportunities.

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

He notes that posts on Indeed show that more employers are even mentioning sign-on bonuses and other up-front hiring incentives as a way to lure job seekers to their companies, a strategy he says is generally reserved for negotiations with a preferred candidate.

“When the job market becomes more competitive, the pressure on employers increases more and more to raise wages to attract job seekers,” says Bernard.

The rising cost of living itself is a factor pushing companies to raise employee wages, according to the Bank of Canada. Business Outlook Survey released on Monday.

The erosion of affordability at gas stations and grocery stores is also pushing workers to raise their wages.

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

he wrote a report in april showing that the growth of workers’ wages was well below the 3.4 percent average inflation in the last two years, especially in the public sector, education and health care.

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

Inflation is now well above that average, hitting 7.7 percent in the latest national reading for May, giving wages more of a boost than ever to rise to meet demand.

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

“You are going to see substantial real wage losses this year because it would be pretty hard to find employees who are seeing an eight percent wage increase this year alone. And that’s what you need to keep up with 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 surprisingly calm for Canadian wages, the payroll survey has just to shoot an inflation archery. .”

In fact, higher wages can contribute to inflation itself, Bernard explains.

“Wages are important when it comes to keeping up with the cost of living. But there are potential spillover effects on prices and the cost of living itself,” he says.

If companies raise wages to keep and attract employees, those higher labor costs are often reflected in the cost of goods and services, Bernard says. If left unchecked, the Canadian economy could slip into a cycle of rising wages that will never keep pace with rising prices.

Respondents to the Bank of Canada Business Outlook Survey said they planned to pass on costs generated in part by rising wages to consumers. CFIB members said they expect their average prices to rise 4.8 percent over the next year, according to June’s Business Barometer.

However, Bernard points out that this may not have been the main fuel for Canada’s current inflationary episode. Global factors like the war in Ukraine are having a big impact on supply, affecting domestic prices more than the first rumors of wage growth.

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

Some major inputs to inflation, like rent, tend to rise in correlation 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 prevent by raising interest rates and slowing down the economy.

For that reason, Bernard says the central bank might have reason to suppress wages.

“It could be the case that wage growth is not the main source of the factors driving inflation today, but it could be of greater importance tomorrow,” he says.

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

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 seek to rein in inflation.

Macdonald says the Bank of Canada will have little wiggle room to avoid slowing wage growth as it seeks to rein in inflation.

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

“That’s one of the big challenges when you use interest rate policy, is that it becomes a very blunt instrument and a blunt instrument that will drive down wages. Well, most likely it won’t allow workers to raise their wages to catch up with inflation.”

Macdonald argues, however, that this may not be the only trick to mitigate inflation as wages rise.

Since companies expect wages to grow in the tight labor market, he says companies often raise prices ahead of employee raises.

The result, he says, has been a pandemic recovery driven by corporate profits, not workers’ wages. The ratio of corporate profits to GDP in Canada during the last recovery from the recession has been the highest in the last 50 years. based on a CCPA analysis.

Instead of holding the Bank of Canada responsible for tackling price gouging with the “blunt instrument” of interest rates, Macdonald says governments can take action to regulate “price gouging” by corporations they it allows them to operate with minimal competition or extensive price control. powers, such as grocery stores or oil and gas companies.

If the federal and provincial governments fail to make regulatory changes to control prices in Canada, instead slowly leaving the responsibility for inflation to the Bank of Canada, Canadian workers will suffer permanently lower wages and significant job losses, Macdonald argues. .

“There are a good number of things that governments can be doing to…try to limit inflation. And they should be doing those things now,” she says.

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

With Canadian Press archives