Commentary,  Macroeconomics,  Wages

At Last, Wages are Growing Faster Than Prices… and That’s Good

A turning point has recently been reached in the current inflationary upsurge in Canada. Beginning in February, for the first time in two years, the growth in average hourly wages over the previous 12 months finally matched, and slightly exceeded, the corresponding growth in prices. This is a positive development – but doesn’t mean that workers have ‘caught up’ to recent inflation. Because real wages fell so much in 2021 and 2022, wages will need to grow faster than prices for some years to come to repair the damage to workers’ living standards. As Centre for Future Work Director Jim Stanford explains in this commentary (originally published in the Toronto Star), the Bank of Canada may try to forcibly stop that process of wage repair. This is one-sided and unfair: real wages can be repaired without locking in further inflation, so long as record profit margins come back to earth, and labour productivity grows normally.

Repairing the Damage to Real Wages

By Jim Stanford

When inflation first roared to life after the COVID lockdowns, wages for Canadian workers were left eating its dust. 

Driven by inventory shortages, broken global supply chains, and consumer desperation – all legacies of the pandemic – prices took off in spring 2021. Wages, in contrast, were much slower to adjust to the new, post-pandemic reality. 

Through the first year of the resulting inflation (starting in March 2021), average prices rose 6.7%. Average wages grew less than half as much, just 3.2%. And the gap between prices and wages kept growing.

Indeed, for 23 consecutive months, year-over-year inflation exceeded corresponding growth in average wages. At the end of that long losing streak for workers, prices were 11.4% higher than two years earlier. But wages had grown only 7.4%. The result was a significant decline in the real purchasing power of workers’ incomes.

Like Wile E. Coyote staring despondently as the Road Runner accelerates into the distance, workers had little chance of keeping up with their much faster rival.

Even though wages were clearly lagging inflation, not leading it, the Bank of Canada and some economists still pointed the finger at “overheated labour markets” and rising wages as the alleged culprit behind post-pandemic inflation. So workers are being unfairly targeted for tough medicine to cure inflation that they didn’t cause.

The Bank of Canada has raised interest rates eight times – most recently on Wednesday – to deliberately raise unemployment and undermine future wage gains. The Bank mostly ignores the other factors, like lingering supply constraints and excess corporate profit-taking, that actually fueled post-pandemic inflation.

Happily, in recent months wages have been slowly closing the gap. This is partly because inflation slowed down since last summer. But also because workers, individually and collectively, are demanding higher wages to protect their living standards.

Big job ahead to repair real wage damage

By February this year, a turning point was reached. For the first time in two years, wages passed prices: average hourly wages grew 5.4% over the preceding year, just slightly more than prices (up 5.2%). This gap persisted for March and April, and almost certainly May. Yesterday’s jobs report from Statistics Canada reported annual wage growth of 5.1% for May, while inflation (which won’t be reported until late June) will likely fall to 4% or lower.

It’s far too early for workers to pop any champagne corks. Two years of lagging behind prices reduced real wages by close to 4%. That means wages would have to grow faster than prices by a considerable margin (say, two percentage points a year) for a considerable time (say, two years) just to repair the damage done to purchasing power since early 2021.

Nevertheless, the fact that wages are now growing faster than prices is good news for Canadians who work for a living. And it’s testimony to the effectiveness of labour policies aimed at boosting wage growth – including significant increases in minimum wages in most provinces (except Alberta), and labour law reforms in some jurisdictions to support stronger collective bargaining by unions.

In fact, Canada is one of the first countries in the OECD where wages have caught up to inflation. This won’t happen in the U.S. for a few months yet – while in Europe, the U.K., and Australia it isn’t even close.

Now that the wage-price tables have been turned, we can expect fear-mongering over the risks of a “wage-price spiral” to reach a fever pitch. Claims that faster wage growth will “lock in” inflation have been commonplace since this inflation started. But they’ll get much louder, now that wages are actually growing faster than prices.

This ignores that after two years of falling real wages, wage growth needs to exceed inflation just to repair the damage done to purchasing power and living standards. This need not reinforce inflationary pressures, so long as employers’ profit margins (which hit record highs last year) come back to earth and labour productivity grows normally.

If the Bank of Canada forcibly prevents real wages from recovering their losses of the past two years, it will lock in a terrible maldistribution (from wages to profits) that occurred during these post-pandemic disruptions. Workers have been through enough since COVID hit. They are fully justified in refusing to give up even more.

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.