Your paycheque has finally closed the gap with inflation

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 per cent. Average wages grew less than half as much, just 3.2 per cent. 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 per cent higher than two years earlier. But wages had grown only 7.4 per cent. 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 fuelled 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.

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 per cent over the preceding year, just slightly more than prices (up 5.2 per cent). This gap persisted for March and April, and almost certainly May. Friday’s jobs report from Statistics Canada reported annual wage growth of 5.1 per cent for May, while inflation (which won’t be reported until late June) will likely fall to 4 per cent 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 per cent. 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.