If striking bureaucrats get their pay raises, inflation might never end

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Gus Carlson is a U.S.-based columnist for The Globe and Mail.

When 155,000 federal government workers walked off the job this week, they tested more than the resolve of the government and the patience of Canadian taxpayers. They also tested Newton’s third law, which states that for every action there is an equal and opposite reaction.

There is no question that the cost of living has been rising and that people need relief. But that does not come from simply giving everyone more money.

In their quest for wage increases – some of which, such as the almost 30 per cent over three years for Canada Revenue Agency workers, are quite stratospheric – the public-service unions are potentially lighting the fuse on a new round of high inflation and the inevitable tightening of monetary policy that will follow. If the Public Service Alliance of Canada gets its demands, it will also set a precedent for other contract negotiations in the near future, with labour leaders emboldened to ask for more and more – not a good thing, for the impact on inflation will be compounded.

Explainer: More than 155,000 federal government workers are on strike. These services will be affected

Bank of Canada Governor Tiff Macklem has said as much. And while the unions have called him out as a bag man for Bay Street banks and economists, he is simply doing the math: If wages go up, prices go up, and so will interest rates.

That’s why Mr. Macklem has urged business leaders to resist the temptation to build high inflation into wage negotiations. Creating long-term contracts based on historically high rates of inflation simply perpetuates the problem, creating an almost permanent state of elevated inflation, and does not allow the situation to stabilize.

Economists last saw this sort of wage-price spiral in the 1970s, when businesses and workers expected permanently higher inflation, and both prices and wages were pushed up in a twisted, self-fulfilling prophecy.

For their part, the unions see Mr. Macklem and his ilk as economic Henny Pennys, overstating the risks of a wage-price spiral in an attempt to undermine the bargaining power of unions. It is a scare tactic, they say, that began long before the 11th-hour bargaining sessions leading up to the mass walkout this week.

To be sure, it is in the interest of union leaders to shoot the messenger, even if the message he delivers is a provable equation with historical precedence. Maybe they see this moment as a golden opportunity to make wage gains for the faithful regardless of any broader economic impact and, in the process, plump up their membership rolls. Nothing attracts moths like the flame of a fatter payday.

What makes the prospect of a state of perpetually high inflation even more problematic is that we are just seeing a ray of hope that inflation is receding in a tangible way after 40-year highs, the result of choking interest-rate hikes in both the U.S. and Canada for the past year.

Undoing this exhausting Gordian knot is important to everyone, not just union members. PSAC as a whole is asking for only a 13.5-per-cent wage increase, not the CRA’s 30 per cent. But the unions are also asking for non-wage increments. Taking into account leaves and benefits, the government has characterized the demands of one bargaining group to be almost 50 per cent. Even if the unions call that characterization inflated, the ripple effect would be significant.

It would clearly contribute to making the Bank of Canada’s goal of getting inflation back to about 2 per cent – which would benefit everyone – virtually impossible.

More broadly, another round of back-breaking inflationary pressure in Canada would threaten to hobble the country’s economic health and global competitiveness. If the economies of the U.S. and other key trading partners emerge with vigour on lower inflation and easing interest rates, playing catch-up will not be easy.

In the end, this strike by public-sector labour goes well beyond the services that will be affected the most in the short term, such as the ability to get a passport or a boating licence or cross a border without delay.

This issue goes to whether Canadians are willing to be held hostage by unions and have their economic well-being and global competitiveness threatened by these wage demands.

What remains to be seen is if the federal government’s equal and opposite reaction to the union demands is a hard “no.” If it’s not, be prepared to get into the inflation barrel again.