But just as incomes might be ready to catch up after years of pandemic pay lags, economists say fears of rising wages propagating rising prices could prompt swift action from the Bank of Canada to stifle growth before it happens.
Experts warn interest rates might have to rise higher or more swiftly to ensure rising labour costs aren’t passed on to consumers in an endless inflation cycle.
Friday’s jobs numbers show that, as expected by economists, wages grew at a faster pace, with average hourly wages rising 5.2 per cent to $31.24 year over year compared with a 3.9 per cent annual increase in May, according to Statistics Canada.
In comparison to wage growth prior to the pandemic, June recorded the fastest growth since the collection of comparable data in 1998. However, the rise in wages in June was still below the most recent inflation rate of 7.7 per cent reported in May.
The Canadian Federation of Independent Business (CFIB), meanwhile, reported in its most recent Business Barometer report in late June that employers are expected to raise wages 3.7 per cent over the next year — the highest annual level recorded by the CFIB.
Why are wages rising now?
Brendon Bernard, senior economist at job search site Indeed Canada, says the conditions are ripe for employees to earn higher wages either from their current employer or through changing jobs.
In an interview with Global News, he points to the “tightness” of the labour market, with a low unemployment rate and sizeable number of vacancies, as putting workers in the driver’s seat when it comes to pursuing opportunities.
Employers are more inclined to pay more to attract candidates and to keep the staff they have, Bernard explains.
He notes that postings on Indeed show more employers are even mentioning sign-on bonuses and other hiring incentives upfront as a way to lure job seekers toward their companies — a strategy he says is usually reserved for negotiations with a preferred candidate.
“When the labour market gets more competitive, the pressure’s on employers increasingly to raise pay to attract job seekers,” Bernard says.
The rising cost of living itself is a factor pushing businesses to hike employee wages, according to the Bank of Canada’s Business Outlook Survey released Monday.
Are wages rising enough?
Eroding affordability at the gas pumps and grocery stores is also pushing workers to bid up their wages.
David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, says that workers’ wages did not keep pace with inflation throughout the pandemic.
He wrote a report in April showing that worker wage growth was well below 3.4 per cent average inflation over the past two years, especially in the public sector, education and health care.
So while wages may have risen, adjusting for inflation, workers are facing real wage loss over the course of the pandemic, he concluded.
Inflation is now well above that average, hitting 7.7 per cent at the last national reading in May, putting more impetus than ever on wages to rise to meet demand.
“Workers are way behind inflation,” Macdonald said in an interview with Global News.
“They’re going to see substantial real wage losses this year because it’d be pretty difficult to find employees that are seeing an eight per cent wage increase this year alone. And that’s what you need to to keep pace with inflation.”
What does this mean for inflation?
Doug Porter, chief economist at the Bank of Montreal, sounded the alarm in a recent note to clients on pay and employment data that, “after a long stretch of surprising calm for Canadian wages, the payroll survey just fired a shot across the inflation bow.”
Higher wages can indeed contribute to inflation itself, Bernard explains.
“Wages are important when it comes to keeping up with the cost of living. But there are potential spillover effects on prices and the cost of living itself,” he says.
If businesses are hiking wages to keep and attract employees, those higher labour costs often feed back into the cost of goods and services, Bernard says. If left unchecked, the Canadian economy could fall into a cycle of rising wages never quite keeping pace with soaring prices.
Respondents to the Bank of Canada’s Business Outlook Survey indeed signalled that they planned to pass on the costs driven in part by rising wages onto consumers. CFIB members said they expect their average prices to rise 4.8 per cent over the next year, per the June Business Barometer.
Bernard notes that this likely hasn’t been the main fuel for Canada’s current inflation episode, however. Global factors such as the war in Ukraine are having a major impact on supply, affecting prices at home more than the early rumblings of wage growth.
Read more: Ukraine war will affect food supply, prices
But higher wages also put pressure on the demand side of the inflation equation.
Some major inflation inputs, such as rent, tend to rise in correlation with wages, Bernard says. And when Canadian incomes rise, households are more likely to spend and consume — the exact behaviour the Bank of Canada is seeking to avoid by raising interest rates and dampening the economy.
For that reason, Bernard says the central bank might have cause to suppress wages.
“It might be the case that wage growth isn’t the primary source of factors driving inflation today, but it could have increased importance tomorrow,” he says.
What will the Bank of Canada do?
Many economists believe the Bank of Canada will raise its benchmark interest rate 75 basis points at its next decision on July 13.
Canada’s central bank is expected to follow in the footsteps of the U.S. Federal Reserve, which delivered such a hike last month, as central banks around the world look to tamp down inflation.
Macdonald says that the Bank of Canada will have little wiggle room to avoid dampening wage growth as it looks to tame inflation.
“The Bank of Canada is a one-trick pony and its trick is interest rates” he says.
“That’s one of the big challenges when using interest rate policy, is that it becomes a very blunt instrument and a blunt instrument that will drive down wages. Well, likely what it’ll do is, it won’t allow workers to bid up their wages to catch up to inflation.”
Macdonald argues, however, that this might not be the only tact to mitigate inflation as wages rise.
With businesses expecting wages to grow in the tight labour market, he says companies often hike prices in advance of employee raises.
The result, he says, has been a pandemic recovery driven by corporate profits, not by worker’s wages. Canada’s corporate profit-to-GDP ratio during the latest recession recovery has been the highest of any in the past 50 years, according to a CCPA analysis.
Rather than put the onus on the Bank of Canada to tackle surging prices with the “blunt instrument” of interest rates, Macdonald says governments can take action to regulate “price gouging” from corporations who are allowed to operate with minimal competition or broad pricing control powers, such as grocery stores or oil and gas companies.
If the federal and provincial governments do not make regulation changes to get prices under control in Canada — instead leaving the responsibility of inflation slowly to the Bank of Canada — Canadian workers will suffer from permanently lower wages and significant job losses, Macdonald argues.
“There’s a fair amount of things that governments can be doing to … try to constrain inflation. And they should be doing those things now,” he says.
“Otherwise the bank will do what it does, which is increase interest rates until we get a recession.”
With files from the Canadian Press