Why increasing wages won't help in the cost-of-living crisis

Canadian employers may be tempted to hike salaries, but tread carefully says chief economist

Why increasing wages won't help in the cost-of-living crisis

Canada is sitting at an inflection point right now, poised for either economic recovery or a mounting recession. The ongoing cost of living crisis is sending employers and their employees into a tail spin – one that’s becoming increasingly difficult to break free from.

“The pandemic led to massive government support and borrowing, which started to drive up costs,” Pedro Antunes, chief economist at The Conference Board of Canada, tells HRD. “That coupled with rising commodity prices and a tight labour market, has led to surging inflation – the highest we’ve seen in 30 years.”

This inflation crisis has led to recession fears – with employees struggling under mounting costs and an erosion of real purchasing power. But how did we end up here? According to Antunes, it’s a similar story the world over.

Read more: Province announces perk packages to beat talent shortage

“Central banks in Canada, the United States and elsewhere have been caught by surprise,” he says. “We started increasing rates early in 2022, only after Russia’s invasion of Ukraine. The war resulted in a massive commodity price shock that added another layer to already rising inflation. While commodity prices are now easing, the problem is that inflation has now started to push up wages, a situation that will be harder to break away from.”

Employers have a big challenge on their hands. Canada has a phenomenally tight labour market off the back of a reduction in immigration and retiring boomers. The issue for Canadian businesses is how to hold on to their people – as well as where to find new hires.

“While wages have increased, they haven’t kept up with inflation – meaning employees have lost purchasing power. And while employers may want to increase their people’s salaries, it’s important to be prudent. Lots of employers are offering wage increases to counter inflation this year, but ensure they’re not long-term initiatives.”

Read more: Northwest Territories announces incentives to attract and retain healthcare workers

At the end of the day, it’s a competitive market. If employers want to attract the top talent, then salary increases are certainly part of the solution. However, as Antunes tells HRD, don’t be hasty with your promises. And, if necessary, look to other means of luring in new hires – including non-monetary perks.

“If employers are forced to increase wages because of pressures in labour markets, they counter that by increasing prices. We end up with this wage/price vicious cycle that doesn’t help employees improve their real purchasing power. In the end, this can lead to even higher interest rates, adding to the risk of a recession. Instead, employers should consider one off measures, bonuses or temporary inflation-beating measures to help their staff. That can help get inflation down over the longer term, benefiting both households and businesses.”

HRD recently spoke with Antunes on why 2022 is the “Year of the Retiree” – take a look at our previous interview here.

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