With inflation, public-sector negotiations will get tougher for Trudeau

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Inflation is back as a political issue. For Prime Minister Justin Trudeau, that is likely to lead to tougher negotiations with public-sector unions. And that will become a political issue, too.

Mr. Trudeau and other recent prime ministers haven’t experienced the kind of politically tricky labour conflicts that were commons decades ago – when the rising cost of living fuelled demands for wage increases but governments felt pressure to keep wages, and inflationary signals, under control.

But Mr. Trudeau’s father, Pierre Trudeau, felt that squeeze when he was PM. So did Brian Mulroney, who in 1991 imposed a wage freeze on civil servants as Ottawa struggled with deficits and inflation, which led to a contentious public-service strike and back-to-work legislation.

Now that inflation is back, higher public-sector wage demands are back, too. And Mr. Trudeau’s government can expect the political pressures that come with them.

Already, the country’s largest public-sector union, the Public Service Alliance of Canada, is warning that it expects wages to keep up with what it calls “soaring” inflation when it negotiates contracts for 110,000 civil servants in 2022. They’re asking for raises of 4.5 per cent each year for three years. Talks start in January.

PSAC members won’t be the only ones looking for wage increases. Employees who feel they are losing purchasing power want to be kept whole. Unions will push for higher raises, not just for this year, but over the course of their contracts.

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Inflation is above 4.5 per cent now, so PSAC is seeking a wage increase of 4.5 per cent. But while the Bank of Canada expects inflation to settle down to 2 per cent by the end of next year, PSAC is asking for a 4.5-per-cent increase in the second year of the contract. And the third year. Fears of future inflation lead employees’ unions to look for insurance.

Ottawa always has an interest in keeping pay rises down to keep deficits under control, although pay and benefits are a relatively small part, less than 15 per cent, of the federal budget. Even so, pay and benefits amounted to $46.1-billion in 2019, according to the Parliamentary Budget Officer, so large annual increases would add up in billions over time.

But Mr. Trudeau will also face calls to keep public-sector wage increases down for fear that big pay hikes would raise expectations for raises in the labour market, sending an inflationary signal to the economy.

“I do believe that almost any significant wage settlement now, especially a federal government settlement, will have an important signalling effect for other negotiations and for expectations among others,” Bank of Montreal chief economist Doug Porter said in an e-mail. “So, even if the direct impact is not huge, the indirect effect – especially in such uncertain and fluid circumstances – could have an outsized effect.”

That’s the fear that Pierre Trudeau and Mr. Mulroney faced decades ago, when people talked about wage-price spirals. Most economists think the current inflation is in large part because of pandemic-related supply bottlenecks, but there are still concerns that inflation can beget inflation.

Kevin Page, the former parliamentary budget officer who is now president of the Institute of Fiscal Studies and Democracy, said Ottawa should adopt policies to “anchor” inflationary expectations, including trying to keep annual wage increases around 2 per cent.

Not everyone will agree with that – especially not public-sector unions. They won’t want their members to bear the burden of inflation to send a signal of restraint to other employees.

And Mr. Trudeau’s Liberals don’t want to be the government telling workers they have to hold the line on raises. They came to power in 2015 by running against what they framed as Stephen Harper’s tight-fisted austerity. They won’t want contentious talks with civil-service unions.

But Mr. Trudeau will face a lot of counterpressures, too. Demands for big public-sector raises get a lot more attention when everyone is talking about inflation. There will be plenty of folks calling for the Liberals to constrain the wages of civil servants – and accusing them of spurring inflation if they don’t.

Those were the kinds of crosswinds that prime ministers faced decades ago, when inflation fuelled conflict in public-sector negotiations. The return of inflation could put Mr. Trudeau in the kind of squeeze prime ministers haven’t faced for a long time.

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