The Bank of Canada’s fears of a wage-inflation spiral are overblown, a study finds. Salaries should be adjusted to reflect the latest cost of living surge without further delay.
On average, Quebec workers have seen their weekly earnings drop by 6.5% since the start of the COVID-19 pandemic when the effect of inflation is taken into account. An immediate increase in their salary to compensate for this loss of purchasing power would have little impact on the level of inflation, nor on its return to the Bank of Canada’s 2% target, concludes the Research Institute and socio-economic information (IRIS) in a study that was due to be unveiled on Thursday.
This conclusion comes in response to the call for restraint launched in recent months by the central bank to Canadian employers who might be tempted to offer their workers salary increases so generous that they would maintain the inflation that we are looking for, on the contrary, to be tamed with high interest rates.
However, contrary to what the Bank of Canada fears, “historical analyzes show that wage-inflation spirals are very rare and unlikely in reality,” note the authors of the study. According to their calculations, an immediate and widespread wage catch-up of 6.5% in Quebec would add, at most, 0.8 percentage point to inflation over one year. This additional increase in the cost of living should also be compensated, they continue, which could give a total salary increase of 7.3% by May 2024.
Such an increase would result, at most, in an increase in the price level of 1.6% over three years, they estimate, “which would not significantly delay the return to the inflation rate targeted by the Bank from Canada “. Thus, they conclude, contrary to what the latter seems to think, “the objective of workers to preserve their purchasing power by increasing their wages and other incomes is not contradictory with the objective of bringing inflation at rates close to the desired target.
In its latest overview of the Canadian economic situation, in April, the Bank of Canada noted that wage growth over one year remained around 4% to 5%. However, she was pleased to hear employers tell her that they were planning to slow down this pace over the next year. Because, she explained, “unless productivity growth becomes surprisingly strong, it will not be possible to meet the 2% inflation target if wage growth remains in this range of 4 to 5 %”.
Salary increase for 20 years
But the Bank should know better, says IRIS. From 2000 to 2022, for example, the average hourly wage in Quebec increased by 24%, even after neutralizing the effect of inflation and changes in the composition of the labor market, i.e. mean the displacement of part of the labor force from lower-paid jobs to better-paid jobs. However, this did not prevent the Bank of Canada from hitting its inflation target of 2% most of the time.
This is probably due to the fact that these salary increases stemmed in part from an improvement in productivity, explained to the Duty Raphaël Langevin, co-author of the IRIS study with Eve-Lyne Couturier. But it is also proof that a return to and maintenance of inflation at 2% is possible at the same time as wage increases above this level.
“We can expect, in terms of wages, a possible return to pre-pandemic trends, explains Raphaël Langevin. But if an upward correction is not made quickly to compensate for the latest surge in inflation, it is to be feared that this loss of purchasing power will never be erased. »