Commentary,  Macroeconomics,  Wages

Don’t Make Workers Pay for Inflation they Didn’t Cause

The gap between inflation and wage growth for Canadian workers is exacting a punishing toll on real living standards. In the last 12 months alone, consumer prices increased more than twice as fast as wages. The gap between the two translates into a substantial reduction in real living standards for workers.

In this commentary (which originally appeared in the Toronto Star), Centre for Future Work Director Jim Stanford provides evidence that the current surge in inflation cannot possibly be attributed to labour costs. Business profits have widened as inflation picked up steam. Lifting wages (for both private and public sector workers) to protect against the effects of inflation does not cause inflation – and so long as the true sources of price pressures (supply chain disruptions, the housing bubble, and the spike in world oil prices) are addressed and resolved, inflation will subside.

We Can Protect Workers Against Inflation, Without Causing Inflation

by Jim Stanford

There’s a painful contrast in the latest Statistics Canada data on prices and wages. Average consumer prices increased 6.8% over the past year – the fastest in over 30 years. In contrast, average hourly wages grew 3.3% in the same period. You don’t need an economist to see what this means: prices are growing twice as fast as wages.

That widening gap means real (inflation-adjusted) compensation for Canadian workers is shrinking – and quickly. On average, workers lost over 3% of their real purchasing power in the past year alone, with more to come.

Public sector workers face draconian pay caps that amplify the losses from inflation. For example, 270,000 public sector workers in Ontario have had pay rises capped at 1% by the Ford government since 2019. As compensation for their bravery and dedication during the pandemic, their real wages will be cut 5.5% this year alone.

Other governments are imposing only slightly less draconian real wage cuts on their public servants. The federal government is offering its staff an average 1.7% per year over four years. Other provinces are capping pay rises well below labour market averages, and even farther behind inflation. 

No-one can credibly argue the current inflation was caused by workers. Wages have lagged well behind prices since mid-2020, and workers’ share of GDP is shrinking as prices surge. No, this inflation was clearly caused by supply chain disruptions (like semiconductors and cars), the housing bubble, and the energy price shock following Russia’s invasion of Ukraine.

Those factors will likely moderate in coming months: real estate prices, for example, are already falling. Higher interest rates will cut deeply into domestic spending. 

But even if inflation subsides, what will happen to workers’ wages in the meantime? If wages aren’t lifted, and quickly, workers will experience a permanent reduction in their living standards as a legacy of inflation they didn’t cause – but which enriched others (from petroleum giants to housing developers to grocery chains). 

That’s morally reprehensible, and economically damaging. It causes household financial fragility, greater inequality, and conflictual labour relations (already visible in Ontario’s construction strikes).

Employers, whether public or private, can certainly afford to boost wages in line with prices. Government revenues are increasing lock step with inflation; that’s why budget balances, both federally and provincially, are much stronger than anticipated. Governments have plenty of room to increase wages at the same pace.

Private sector employers, too, are reaping wider profit margins as consumers shell out for higher prices. Wholesale margins have grown more than twice as fast as overall inflation, and pre-tax corporate profits  have reached their largest share of revenues in over a decade this year as inflation took off. 

It’s clear the current situation is a case of profit-price inflation, not wage-price inflation. Suppressing wages doesn’t address the cause of the problem, and will have no value curing it.

It is possible to protect workers against inflation, without causing more inflation. Unit labour costs grow more slowly than wages (thanks to productivity growth). And labour costs make up only one-third of direct production costs, on average, across all industries. So honest businesses only need to increase prices one-third as fast as wages while still preserving their (already-swollen) profits.

So long as the actual causes of inflation are addressed (by fixing supply chains, energy prices, and housing), inflation would then decelerate, even as wages keep up. Contingent wage protections (like cost-of-living adjustments) would also maintain the purchasing value of wages, without prompting higher inflation.

Meanwhile, governments could act to directly bring down some prices: like child care; health, dental, and drug costs; transit fares; and even housing (through expanded non-market housing construction). To the limited extent that domestic demand pressures are reinforcing higher prices, it is better to use more focused and fair contractionary measures to dampen spending. The federal NDP’s proposal to lift taxes on petroleum companies, and recycle revenues to enhanced social benefits, would be neutral in its effect on inflation, while helping protect the hardest-hit households.

Whether public sector or private, workers should reject the permanent reduction in real wages their employers are demanding. Workers didn’t cause this inflation. And they shouldn’t have to pay for it.

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.