The central banks were very, very afraid that inflation would cause an escalation in wages which would in turn fuel soaring prices. But this famous “wage-price spiral” has not materialized, and workers are seeing their purchasing power continue to decline while waiting for the recession.
It’s a story that starts well. Much has been said, rightly, of how the terrible economic crisis of the early 1980s and 1990s and the rise of certain right-wing values resulted in a gradual decline in the real purchasing power of households. What is said less is how this trend was reversed in Quebec somewhere from the mid-1990s.
The Chair in Taxation and Public Finance at the University of Sherbrooke came to document this phenomenon with a study on Wednesday, which tracks the evolution of the real purchasing power of 14 different types of households. We see in particular that, from 2000 to 2019, the total increase in the median disposable income of Quebecers was from 13% (single people aged 75 and over) to 64% (single-parent families), couples with children (40% ) and no children (38%) somewhere in the middle.
These increases in purchasing power, which take inflation into account, are attributable to productivity gains which have been reflected in wages, as well as to tax cuts and increases in social transfers intended in particular for households with children, explained the study authors. They could no doubt also have mentioned the effect of the establishment of a public network of daycare services and the other family policies of the late 1990s, which greatly favored the participation of women in the labor market.
Then came the COVID-19 pandemic, which forced the public authorities to put whole sections of their savings on hold by compensating as best they could for the loss of income of workers affected by massive financial assistance programs. The heavy clouds of COVID had barely begun to disperse when the cost of living began to soar, causing a decline in the real purchasing power of couples with children in particular this year (- 2.1%) and without children (-1%) as well as that of single-parent families (-3.9%), estimated the Chair of the University of Sherbrooke.
The evil spiral
Guardians of low and stable inflation, the central banks began, at the same time, to fear that this escalation in prices would cast doubt on their ability to correct the situation and give workers the idea of demanding wage increases. more important than usual and to their employers, faced with a labor shortage, to grant it to them. Although in the opinion of the Bank of Canada itself, the rise in inflation is “essentially” the result of factors external to the Canadian economy, its governor, Tiff Macklem, was so afraid of seeing “a spiral of wages and prices that feeds itself” that he asked, this summer, companies to hold firm in the face of the demands of their employees.
“The high inflation we have today is not normal. It will not last, he hammered during a videoconference at the Canadian Federation of Independent Business. Do not build this into long-term contracts. Do not include this in wage contracts. »
But to make sure everyone gets the message, the best thing is to show how central banks are taking this whole thing seriously and raising interest rates much faster and higher than we would have done. normally, explained the Bank of Canada in its July Monetary Policy Report. “Once inflation expectations are firmly pegged to the inflation target, a wage and price spiral is much less likely. »
Interest rates in Canada, as in several other countries, have thus jumped this year, putting a damper on household consumption and business investment and suggesting a sluggish economic period, even recessions that we hope modest.
However, when we look at the case of a little more than twenty inflationary episodes similar to what we know today and which have occurred in advanced countries over the past 50 years, we see that, “on the whole, these episodes did not create a price-wage spiral”, explained this autumn one of the authors of a detailed analysis of the question of the International Monetary Fund. This is due in particular to the fact that wages were not the primary cause of the rise in inflation, that this inflation is already weighing down consumer demand and that, as today, the banks are quick to tighten the screws with their interest rates in case of doubt.
Another kind of spiral
One thing is certain, the increase in wages was far from fueling the inflationary outbreak in the first half of the year in the world, observed last month the International Labor Organization in its annual portrait of the situation. In fact, it was even the first time that we had seen the world average of wages decrease, once the effect of inflation was taken into account, since this data began to be counted, in 2008, in particular because a decline of 2.2% in advanced economies. As labor productivity has not ceased to increase, “it would seem [pourtant] conceivable to increase wages without fear of provoking a wage-price spiral”, it said.
That doesn’t seem to be happening in Canada or Quebec any time soon, according to the most recent inflation statistics released on Wednesday. Struggling with a 6.8% increase in consumer prices in one year, Quebec workers continued to become poorer in November, since their average hourly wage increased, at the same time, by only 6.4%. It was the same the month before (6.4% against 5.6%), and the month before again (6.5% against 5.6%), and before again (7.1% against 6.9%)…