Be careful with wage rises – BoC deputy

Give your staff too much, and the country could see entrenched inflation (and higher interest rates)

Be careful with wage rises – BoC deputy

As staff see inflation hitting their purchasing power,  the loonie in their pocket is buying less and less – which is why, no doubt, pay demands are coming in thick and fast. And while we want to make sure we remain competitive and keep the talent our businesses need, according to the Bank of Canada’s Carolyn Rogers, we need to try to keep a tight rein on pay.

Inflation, which was running at 7.6 % in July and is now at 8.1%, is far above the bank’s 2% target – and as Rogers said last week – the bank is concerned that a wage-price spiral would see inflation become entrenched in the Canadian economy, as businesses put up prices to cope with pay increases.

Workers are “looking at the rate of inflation and what it’s doing to their purchasing power, their budgets, and they’re looking at the same tight labour markets and they’re thinking ‘I need a raise,’” Rogers said to reporters a day after the bank hiked interest rates by 0.75%.

Rogers, the senior deputy governor at the bank, has already made comments that some have interpreted as calls to try to keep wages down. In mid July she told the Canadian Federation of Independent Business not to plan on high inflation staying around too long. “Don’t build that into longer-term contracts,” she said. “Don’t build that into wage contracts. It is going to take some time, but you can be confident that inflation will come down.”

How bad is Canada’s inflation?

Inflation in the G20

 

Turkey     

78.6%

Argentina 

64%

Russia                  

15.9%

Brazil                    

11.9%

Spain                   

10.2%

U.K.                       

9.4%

U.S.                       

9.1%

Netherlands      

8.6%

Euro Area           

8.6%

Canada   

8.1%

Italy  

8.0%

Mexico 

8.0%

Germany   

7.6%

South Africa       

7.4%

New Zealand (not G20) 

7.3%

India                     

7.0%

Singapore           

6.7%

Australia             

6.1%

Friday’s jobs numbers, however, have bad news for those hoping to see inflationary pressures slow. Average hourly wages grew 5.2% year-on-year rising to an average of $31.24 – that rate is a substantial increase over May’s 3.9%. And a survey by CFIB found members expect to increase wages by a record amount over the coming year.

The same CFIB survey found that the biggest factor limiting their members’ growth was a shortage of labour – yet another factor helping put pressure on wages in a tight market. And Canada isn’t alone – across the world businesses have bounced back from Covid and are desperately scrambling for talent.

“When the labour market gets more competitive, the pressure’s on employers increasingly to raise pay to attract job seekers,” Brendon Bernard, senior economist at job search site Indeed Canada told globalnews.ca. He also pointed to the proliferation of sign on bonuses and other incentives  the site was seeing as employers scrambled to hire.

The global talent shortage

Country

Unemployment rate (%)

Switzerland

2

Singapore

2.1

Japan

2.6

South Korea

2.9

Australia

3.4

Mexico

3.4

Netherlands

3.6

United Kingdom

3.6

United States

3.7

Russia

3.9

Canada

5.4

China

5.4

Germany

5.5

Indonesia

5.83

Saudi Arabia

6

Euro Area

6.6

Argentina

7

France

7.4

Italy

7.9

India

8.3

Brazil

9.1

Turkey

10.1

Spain

12.48

South Africa

33.9

(Figures: tradingeconomics.com)

Whatever the bank hopes, unless the bank’s hawkish rate rises do slow the economy, businesses are still going to be under incredible pressure to boost wages – and in doing so push the BoC to in turn, put more pressure on homeowners.

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