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Economists Say Wages Not High Enough To Match Rising Inflation

Even though record job vacancies lead to higher wages, economists say wages are still not high enough. 

While overall inflation increased 7.6 per cent in July despite a 5.2 per cent increase in the average hourly salary, this indicates that worker compensation is not keeping up with consumer costs.

As a result of the record number of vacancies, workers are offered more wages, but those wages aren’t keeping up with inflation.

According to a report released this week by Statistics Canada, 1.03 million jobs remained unfilled in Canada in June, an all-time high and the third consecutive month with more than one million vacancies. It represents a 3.2 per cent rise from May.

Employers needed to fill 149,700 positions last month, most of which were in health care and social support. Meanwhile, there were 171,700 vacancies in the restaurant and food service industries.

Despite lifting almost all COVID-19 regulations, vacancies have persistently remained high in Canada. As a result, employers in high-vacancy sectors have responded by trying to increase compensation for new hires in the hopes of filling positions that have been vacant for a while.

As unions negotiated for better pay with employers and businesses paid more compensation to new hires, the average hourly wage increased 5.2 per cent year over year in July.

However, overall inflation increased 7.6 per cent in July compared to the same month last year, indicating that worker pay is not keeping up with the high cost of consumer prices.

David Macdonald, senior economist at the Canadian Centre for Policy Alternatives, says it would reasonably be good salary increases when inflation was not close to 8 per cent.

“But wage growth in the five per cent range just isn’t enough right now.”

Macdonald explains that a 5.2 percent pay growth compared to a 7.6 percent increase in consumer prices results in a wage decrease.

While central bankers agree that higher wages are good for workers, they have also worked to avoid what economists call a “wage-price spiral,” in which employees want higher wages to keep up with rising living expenses.

The Bank of Canada fears inflation will become a permanent feature of the Canadian economy if not controlled, creating a self-fulfilling prophecy where consumers and businesses continually raise prices because they anticipate cost increases. Many independent economists share this concern.

Recent interest rate decisions by the bank have heightened concerns that some Canadians would lose their employment and that wages will stagnate as borrowing costs climb.

As interest rates are higher, borrowing money is difficult. As a result, consumers will spend less on large purchases, and businesses will reduce operational investments. Businesses are frequently forced to cut expenses and freeze hiring as economic development slows, increasing unemployment.

Economists anticipate that wage growth would likely decelerate due to the central bank’s plans to raise interest rates even further in the upcoming months – its next interest rate decision is in September.

Further, Macdonald added, if many individuals lose their employment, few people will want to request rises. Employees don’t request raises in a labour market with a seven to eight percent unemployment rate. The economy isn’t in the right place right now, Macdonald added.

Presented by CTC News