Early signs Canada could be moving towards a wage-price spiral: Economist

Toronto ON-August 30. File Images of window postings for Help Wanted signs at Toronto businesses. Any use file photos. (R.J. Johnston/Toronto Star)        (R.J. Johnston/Toronto Star via Getty Images)
As more and more workers demand higher pay in the face of sky-high inflation, economists are debating whether Canada is in for a wage-price spiral. (R.J. Johnston/Toronto Star via Getty Images)

As more employees demand higher salaries in the face of 40-year-high inflation, one economist says there are early signs a wage-price spiral is in the cards.

“I think we're getting some signals that we're moving that way. I think we've avoided one so far, but let's be honest, we've had above-target inflation for 18 months now,” said Warren Lovely, the managing director of economics and strategy at National Bank Financial Markets, said in a phone interview with Yahoo Finance Canada.

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

A new survey from consulting firm Eckler Ltd. found Canadian employers expect the national average base salary to rise 4.2 per cent this year, the highest in two decades. The survey, which was conducted between July and August and polled 269 Canadian firms across various sectors, said the results were similar to 2022 base pay increases.

“I think what we're starting to see more and more evidence of in these surveys and, in fact, in some of the wage agreements that we're seeing, is a little bit more embedding of higher wage increases, which could make this inflation problem more persistent,” Lovely said.

A wage-price spiral, when higher wages and inflation continuously feed into each other, is something the Bank of Canada is trying to avoid.

Bank of Canada Governor Tiff Macklem issued a word of caution to business owners in July.

“My one bit of advice is, the high inflation we see today is not here to stay. So, when you’re entering into longer-term contracts, don’t expect that inflation is going to stay where it is now. You should expect that it’s going to come down,” Macklem told an audience at a Canadian Federation of Independent Business event at the time.

Lovely said the central bank is “desperate” to prevent a wage-price spiral from taking hold since it requires an even tougher monetary policy response, resulting in greater damage to the economy.

So many of the factors driving inflation have been quite global in nature.Brendon Bernard, senior economist, Indeed.com

While the conditions for stronger wage growth, such as runaway inflation and a persistent labour shortage, have been building for some time, not all economists are convinced the country is headed towards such a spiral.

“Looking at where inflation has been really strong and has picked up of late, I don't think, at least the story of inflation so far, has been mainly around a wage-price spiral. So many of the factors driving inflation have been quite global in nature,” said Brendon Bernard, a senior economist at job seeking website Indeed.com, via phone.

He acknowledged that a spiral could develop but added that rapid Bank of Canada interest rate hikes could “short circuit” that process.

The Eckler survey also showed pay increases were the number one way employers plan to attract and retain talent amid a tight labour market.

The push for productivity

Higher wages could also be the final push employers need to ramp up their adoption of machinery and technology, where they have traditionally heavily relied on labour for productivity, the economists said.

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

A study from Statistics Canada released in July 2022 found businesses that faced a labour shortage were nine per cent more likely to plan the adoption of new or additional digital technologies.

“More recently, you know, the productivity data leave a lot to be desired. Now, we're at a stage where there really just doesn't look to be a lot of available workers to plug into the economy to meet that marginal sale or that marginal bit of demand,” Lovely said.

“And if we start to see more persistent wage pressure, if labor becomes more expensive, the one thing that would be reasonable to expect is that businesses might shift their focus, and it might provide the incentive for businesses to invest in that other factor of production: machinery and equipment. And that might eventually see some improvements in productivity.”

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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