More questions than answers
This was a week that asked so many questions of us.
A critical question that was eclipsed by current events – but only temporarily – concerns the relationship between inflation and wage growth.
This week, Statistics Canada announced that prices rose on average 5.1% year-over-year, the fastest pace of inflation since 1991. Meanwhile average wage growth was 2.4%, one of the lowest paces of increase in the past twelve months.
People worry rising prices will lead to lost purchasing power if wages don’t keep up. Businesses worry rising prices will lead to more pressure for wage growth. And policy makers are concerned about the relationship between the two, and the potential for sustained inflationary pressures.
Will inflation keep rising, and will wage growth be the driver? We’re not sure.
What we do know right now is that inflationary pressures are not coming from wage growth. The prices that are rising the fastest (housing, gas, food) have low labour components, and workers’ pay in those areas isn’t fuelling wage growth.
And what we know right now about wage growth is that it is not widespread, though there are pockets of rapid growth, for example in new job postings in sectors with labour shortages.
The evolving relationship between inflation and wage growth is one to watch in the era of population aging, which will likely lead to sustained labour shortages. Right now, we need to monitor the data because this two-way, chicken-and-egg relationship is not predictable, contrary to Econ101 “raise wages and prices will go up” logic .
Sometimes higher prices lead to higher wages; sometimes not. Sometimes higher wages lead to higher prices; sometimes not. Sometimes the labour component of production is a relatively large share of input costs, as in healthcare or child care; sometimes not, as in oil and gas extraction or auto manufacturing. (Did you know that labour accounts for 4% of the price of an average Big 3 vehicle in Canada?)
The presence or absence of wage growth affects the potential to deliver an equitable recovery or precipitate falling purchasing power. The former increasing economic growth and the latter dragging it in the short-term.
In the coming months I’ll track whether wage gains are widespread or limited; and if limited, whose wages are rising. The breadth and speed of wage growth could answer urgent questions that this moment is asking about the nature of inflation and how to control it.
A final thought: new inflationary pressures may be accompanied by new narrative pressures. Expect caution, even fear-mongering, about wage increases as more people organize to form a union, strike, or switch to jobs where they earn more.
The relationship between inflation and wage growth is not clear, but that muddy space could be used to pit you, as a consumer, against yourself as a worker. When prices go up, it’s not necessarily because of wage growth; but who’s telling the story of what’s happening? And what happens when wages don’t go up?
We all have blind spots. My goal in data mining is to marshall the power of knowledge, making the patterns of what is happening more visible so we don’t booby trap ourselves. But don’t forget the role that knowledge of power also plays. Be aware there are interests that would prefer to divert us from the path to an equitable economic recovery, and ready yourself for them.
I’ll circle back to this story when the week has more answers than questions.
The Atkinson Fellow on the Future of Workers is supported by the Atkinson Foundation. Find more information here.