Ottawa must strike delicate balance on inflation during labour negotiations, economists say

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Striking federal employees have one overarching goal: to regain purchasing power that has been whittled away by inflation.

The calculus is more complicated on the government’s side of the bargaining table, with the possibility that large wage settlements could prolong the fight to get inflation back under control.

A significant wage increase for the roughly 155,000 federal workers negotiating with the government is unlikely, by itself, to add much fuel to the inflationary fire, economists say. But an open-handed settlement could make the Bank of Canada’s inflation-control job more difficult if it becomes the benchmark for bargaining across the country.

“The very public wage negotiations come at an incredibly delicate time for the inflation backdrop, potentially setting the tone for a vast array of settlements elsewhere,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients last week.

“A wave of wage settlements in the zone of 4 per cent or higher across the economy, at a time of almost no productivity growth … could put a hard floor under inflation.”

How do strikes work in Canada? An intro to unions and labour laws

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

Canadian workers are hardly to blame for the surge in consumer prices over the past two years. Until February, average hourly wage growth lagged consumer price index inflation, implying a decline in real wages for both public- and private-sector workers.

But this dynamic has become more complex in recent months. The annual rate of inflation has fallen steadily since hitting a four-decade high of 8.1 per cent in June. It reached 4.3 per cent last month. The annual pace of wage growth, by contrast, has remained in the 4-per-cent to 5-per-cent range since last summer – supported by near record-low unemployment and high demand for workers.

Bank of Canada officials have said this pace of wage growth is “not consistent” with restoring price stability. Inflation is expected to fall to around 3 per cent by this summer, but it will be difficult to wrestle back down to the bank’s 2-per-cent target unless wage growth moderates, the central bankers argue.

This has created a thorny environment for one of the largest strikes in Canadian history, which began last week when more than 100,000 federal workers walked off the job.

The Public Service Alliance of Canada is asking for a 13.5-per-cent wage increase over the next three years for around 120,000 of its members, while the PSAC unit that represents Canada Revenue Agency workers is asking for 22.5 per cent over three years. The government’s current offer for both bargaining units is 9 per cent.

“It’s not necessarily inflationary to compensate workers for inflation that’s already happened,” said Nathan Janzen, assistant chief economist at Royal Bank of Canada. “But it would be if you’re baking a higher expected rate of inflation into wage negotiations for years to come.”

Bank of Canada officials have dialled back previous warnings about a 1970s-style wage-price spiral, where workers and businesses expect high inflation and push up wages and prices in a self-reinforcing cycle. But the officials have suggested they need to see a slowdown in wage growth – alongside a decline in service price inflation, a drop in inflation expectations and a normalization of corporate price-setting behaviour – to keep monetary policy in its current holding pattern. Otherwise, they may resume raising interest rates.

To have a real impact on inflation, any settlement at the federal level would have to be echoed in other wage negotiations across the country, Mr. Janzen said. “This is a really large strike, but it’s still 0.6 per cent of the national work force,” he noted.

Economists continue to debate the extent of the spillover between public- and private-sector wage-setting. A paper published by the International Monetary Fund earlier this month said that “public wages may have a significant and lasting effect on private wages and core Consumer Price Index inflation,” especially when labour markets are tight, as is the case right now in Canada.

“The findings imply that during periods of high inflation and tight labour markets, public wage policy should balance the need to attract and retain high-quality civil servants against the risk of fomenting inflationary pressures,” the IMF said.

Rafael Gomez, a professor at the University of Toronto and director of its Centre for Industrial Relations and Human Resources, offered a different take. He said federal wage negotiations do provide a benchmark for other public-sector negotiations, although he said this is tempered by differences between federal, provincial and municipal labour markets.

As for the private sector, “there’s almost no crossover,” he said. “It’s not the 1970s, where we have 30 per cent of the private sector unionized. We don’t. We have close to 10 per cent.”

Over the past year, Bank of Canada Governor Tiff Macklem has been criticized by labour union leaders for saying that employers and workers should refrain from building today’s high inflation into their wage contracts. Mr. Macklem has softened his language on the issue, and balanced it out with a call for companies to return to more competitive price-setting behaviour. But his argument remains unchanged.

“I’ve been saying it to businesses, I’ve been saying it to workers, to governments, to Canadians, anybody who wants to listen – you should plan on inflation coming down,” Mr. Macklem told a parliamentary committee last week. “And so whatever kind of contract you’re signing, you should be thinking that inflation is coming down.”