Business Profits from Inflation, but Workers Will Pay to Bring it Down

As the Bank of Canada announced another increase in its trend-setting interest rate today, new data from Statistics Canada confirms businesses have pocketed record-breaking profits from accelerating inflation, while workers’ wages lag far behind.

Centre for Future Work analysis of national income accounts released yesterday by Statistics Canada indicate that after-tax corporate profits reached their highest share of GDP ever in the first quarter of 2022, as inflation surged. After-tax profits grew 11% in the quarter (compared to the fourth quarter of 2021), to an annualized total of over $500 billion. That represents the highest share of total GDP (18.8%) since Statistics Canada began collecting GDP data.

Meanwhile, workers’ wages are lagging well behind inflation, producing a decline in real wages and a shrinking labour share of GDP. Nominal hourly wages grew by 3.3% in the 12 months ending in April – less than half as fast as consumer price inflation (6.8%). The new quarterly Statistics Canada data indicate a 4.6% year-over-year increase in total compensation (including employer payroll taxes) per worker over the previous year, also well behind inflation.

Labour compensation in the first quarter equalled 50.2% of GDP, down almost one percentage point from pre-pandemic levels. In contrast, the share of GDP going to after-tax corporate profits has increased by over 4 percentage points since before the pandemic.

“This evidence confirms the current surge in inflation is being driven by the corporations who set the prices for the things we buy, not by the workers who make them,” said Jim Stanford, Economist and Director of the Centre for Future Work.

“There is no evidence that this inflation is being caused by tight labour markets and rising wages. Yet by increasing interest rates to slow job creation and increase unemployment, the Bank of Canada seems determined to make workers pay to reduce inflation that they clearly did not create.”

“We are learning that we cannot rely on interest rates alone, whether low or high, to single-handedly achieve a strong and balanced macroeconomy. Interest rates are a blunt instrument; they cannot fix the true sources of the current inflation. We need other policies to address those causes without risking an economy-wide downturn.”

Surging profit margins in industries like petroleum products, groceries, and housing reveal that businesses are taking advantage of global disruptions caused by COVID-19, the war in Ukraine, and other factors to increase prices far above their costs of production.

“By trying to protect their real incomes against inflation through higher wages, workers are not causing more inflation. Higher wages are required to defend households’ living standards, and that can be done through measures (like cost of living adjustments) that respond to inflation without locking it in.”

“Policy-makers should tackle the true sources of inflation – speculative housing, volatile fossil fuel markets, and corporate profit-taking – instead of setting up workers as collateral victims.”

“To the limited extent that strong domestic spending power is contributing to inflation, that should be tackled through targeted and fair measures to dampen demand. Higher taxes on the companies which actually impose these higher prices would be a good place to start.”