Are wages and salaries keeping up?

Hey there, time traveller!
This article was published 29/08/2024 (430 days ago), so information in it may no longer be current.

The pandemic caused significant turbulence in the Canadian economy that appears to be finally settling down.

Unemployment reached 13.7 per cent in May of 2020 in the full throes of COVID-19, fell to five per cent by the end of 2022 and has risen modestly to 6.4 per cent as the Bank of Canada pursued higher interest rates to address rising prices. All-items inflation reached 8.1 per cent in June of 2022 but has now declined to 2.5 per cent, well within the one per cent to three per cent target range. A third reduction in the Bank’s policy rate affecting mortgage rates and other consumer borrowing costs is expected when the governing council meets Sept. 4.

Despite evidence of a return to normal economic conditions, there is general dissatisfaction.

Surveys show a greater level of discontent with the economy and with personal affairs. The latest survey from Statistics Canada indicates that the proportion of Canadians who reported that rising prices were greatly affecting their ability to meet day-to-day expenses had risen from 33 per cent in 2022 to 45 per cent this spring.

The employment rate is nearly as high as it has ever been, so Canadians have jobs, but financial malaise lingers and governments aspiring to re-election are blamed.

The economic circumstances actually seem rosy compared to past disruptive episodes. When I joined the University of Manitoba in July of 1979, the stagflation era of double-digit unemployment and inflation was in full swing.

Against my better judgment in retrospect, I allowed myself to be recruited to the faculty association bargaining team as a recently minted “expert” in labour economics and industrial relations. What followed was a practical lesson in the process of collective bargaining under unstable economic conditions.

My graduate education hardly qualified me for the voluminous exchanges of viewpoints and paperwork that constituted bargaining but I did have a good understanding of some important and enduring principles around my area of expertise, wages and salaries.

The most important was that money is a veil over the real economy and only as good as what it will buy. The best overall guide to that purchasing power of money was the Statistics Canada all-items consumer price index, the growth of which should be a benchmark to assess whether a salary settlement was keeping pace with rising prices.

The CPI was growing at a whopping 11.1 per cent in the 1980 bargaining year, but another consideration was that some prices were more volatile than others. Food and energy were particularly volatile because of seasonal factors, international markets and exchange rate fluctuations beyond domestic control. I was acutely aware of this while trying to raise a young family, as food inflation was 13.6 per cent in 1980 and energy inflation stood at 19.4 per cent for the year.

In a period of such rapid inflation, however, the inflation benchmark was hard to pin down.

Previous negotiations with the university had settled on a salary structure, based on rank and tenure, plus an across-the-board scale increase to account for general price inflation.

A new contract therefore needed to account for price inflation that would only be revealed during the contract. But what would inflation be in the future and how could the employer be expected to agree to significant scale increases that might not materialize and that the province probably wouldn’t fund?

Salary reopeners during the life of the contract and cost-of-living clauses were possibilities, remote in our case, but more likely were efforts to make up for past inflation as much as possible, so-called “catch up” increases, and leave the future to reveal itself.

The result is that scale increases fell behind realized inflation.

While I took every opportunity to point this out to my colleagues, I was surprised how often they mistook salary increases for real improvements in their living conditions, rather than momentary suspension of declining real incomes.

Fortunately, inflation declined sharply after 1981 and settled in a range of four to six per cent until 1991. While this made bargaining simpler in terms of anticipating inflation, there was still substantial opportunity for what is known as money illusion, confusing salary increases with improvements in real purchasing power when prices for goods and services are rising. Bargaining would be easier if inflation were low and predictable.

In 1991, a year in which prices rose 5.6 per cent, the Bank of Canada adopted the current target inflation of two per cent, plus or minus one per cent, with a focus on the policy interest rate to control price outbursts. The annual inflation rate averaged 1.8 per cent between 1992 and 2018 and never exceeded 2.8 per cent, an era where reaching consensus on inflation between employer and employee bargaining teams was much less contentious and Canadian wage settlements more than kept pace with inflation.

Moreover, inflation of 1.8 per cent in 1992 was accompanied by food inflation of only 1.7 per cent and energy deflation of 1.4 per cent. These components of the CPI had been so volatile that the Bank of Canada paid careful attention to the path of “core inflation” that excluded them.

That experience appears to have been repeated recently and accounts for some of the discontent. When inflation jumped to 3.4 per cent in 2021 and 6.8 per cent in 2022, Canadian wage settlements only increased by 1.8 per cent and 2.5 per cent annually, leaving wages 6.1 per cent behind in compound terms. And, as food and energy customers are well aware, these volatile sectors again dominated, outpacing wages by 11.5 per cent and 25.7 per cent, respectively.

As inflation has settled down to 2.5 per cent, so has food inflation at 2.7 per cent and energy inflation at 0.4 per cent.

As workers try to recoup some past losses, their discontent is understandable, but I hope they also appreciate that low and stable inflation going forward will pay off for them in the long run.

Wayne Simpson is a retired professor of Economics at the University of Manitoba and a research fellow, School of Public Policy, University of Calgary.