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Labour shortages could push up wages, ‘reignite inflation’ in long run, report warns

February 8, 2023
The Canadian Press

Photo: Getty Images

Protracted labour shortages in Canada could fuel more rapid wage growth and inflation over time, potentially prompting the need for higher interest rates long-term, a new RBC Economics report released Wednesday said.

Wages are growing quickly in Canada, but so far not fast enough to match inflation, the report said.

In November, for example, average hourly earnings were up about 10 per cent compared to pre-pandemic levels, below the roughly 12 per cent inflation recorded over the same period, RBC said.

In 2023, wage increases are expected to be “soaked up by higher prices and debt costs,” which will lower disposable incomes, the report said.

Yet long-run structural labour shortages could continue to push wages higher over time, potentially contributing to inflation.

“While higher wage growth has not proven to be immediately inflationary, that story could change over time,” RBC said.

“With a dearth of available workers, prospective employees will have more muscle at the bargaining table, which will in turn fuel more rapid wage growth.”

There are roughly 50 per cent more job openings now compared with before the pandemic, while the pool of unemployed workers is 11 per cent smaller, the report said.

To compete for staff, employers are boosting pay levels, RBC said.

It’s a scenario the bank warns could “at best slow the pace at which inflation eases and at worst, reignite it.”

“That could force central banks to keep interest rates above pre-pandemic levels for longer to offset higher prices,” the report said.

However, the worker shortage could be offset by capital spending on productivity-enhancing investments like automation.

“Increased business productivity, through capital investments, can offset those pressures by boosting revenues and making it easier for businesses to afford higher wage bills,” the report said.

“But in the absence of this productivity improvement, demand will exceed the available supply of goods and services, adding new inflationary pressure.”

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