Unions are winning big wage gains, which could complicate the Bank of Canada’s inflation fight

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The Bank of Canada is counting on a slowing labour market to help ease wage growth and take the wind out of inflation. But even as slack emerges in employment, recent unionized agreements suggest that wages could linger in the inflation equation long after other pressures have dissipated.

On Friday, Statistics Canada will release new monthly employment data that will very likely show a further softening of the job market. Economists estimate that employment inched up by maybe 10,000 to 15,000 jobs in November, nowhere near enough to keep pace with growth in the labour force, which has averaged more than 50,000 a month over the past six months.

With jobs not keeping up with the number of workers to fill them, the unemployment rate will likely edge up again, after hitting a 20-month high of 5.7 per cent in October.

Those numbers indicate that the high labour demand and severe worker shortages that have dogged the employment market – putting upward pressure on wages and, by extension, adding problematic fuel to the inflation fire – have gone into reverse. Surely, the inflation pressures from labour costs will soon follow, as the job market rapidly loosens.

But the labour unrest that the country has experienced over the past several months suggests otherwise. Unionized workers didn’t fully participate in the wage growth earlier in the recovery from the COVID-19 recession, but we may now be in the midst of a period of catch-up for the unions.

That could mean wage growth could remain a particularly sticky part of the inflation problem.

“Recently negotiated union wage settlements highlight one area of ongoing upside wage pressure that is likely to have some staying power,” a report last week from Toronto-Dominion Bank said.

Normally, we would expect that unionized workers would be able to squeeze better wage increases out of their employers than non-union employees; that is, after all, the biggest attraction of collective bargaining. And, historically, that has been the case. Statistics Canada figures show that, on average, employees with union coverage earn about 10 per cent more than non-union employees.

Yet as Canadians’ wage gains have accelerated in response to labour shortages and inflation, increases for unionized workers have lagged. The average hourly wage for employees with union coverage rose 3.8 per cent in the first 10 months of this year, compared with 4.5 per cent for non-union employees. In 2022, unionized wages rose 4.2 per cent, while non-union pay increased 5 per cent.

A likely explanation for this lag is the nature of union contracts. Agreements that were negotiated several years ago would not have anticipated the inflation and labour tightness of the past couple of years. Workers bound by those contracts, then, would in most cases have received more modest pay increases; they would have to wait for their collective agreements to expire before they could negotiate new wage settlements that would take into account those market conditions.

The labour unrest the country has experienced this year is evidence that unionized workers are now making up for lost time (and money). Federal government statistics show that worker-days lost to labour disputes in the first nine months of 2023 were already 17 per cent above the total for all of 2022 – and 75 per cent higher than the annual average in the five years before that.

It looks like all those work stoppages have resulted in substantial wage gains. The TD report shows that in the third quarter of this year, the average first-year wage increase in new multiyear contracts was 6.4 per cent – the highest in more than three decades.

While those first-year increases clearly have a component of compensating workers for the impact of inflation, the TD report noted that oversized wage gains aren’t limited to the first year of new contracts. Over the entire term of new agreements reached in the third quarter, the average annual wage increase was 4.7 per cent – again, the highest in more than 30 years.

Since those contracts typically run for three or four years, the implication is that unionized wage inflation could continue to run hot for the next several years, even once other pressures that have fuelled unusually high inflation have dissipated.

Given that about 30 per cent of Canadian workers are covered by unions, that could stand as a serious impediment to the Bank of Canada’s efforts to wring the last drops of excess inflation out of the economy over the next year or two. The central bank has been saying for months now that wage inflation in the 4-per-cent to 5-per-cent range is “higher than is consistent with price stability” – meaning the bank’s 2-per-cent target. What we’re seeing in union contracts suggests that, for a substantial portion of workers, this inconsistency will linger for a while.

Indeed, this is a bigger issue for Canada than for many of our major international counterparts. Among G7 countries, only Italy has a higher unionization rate. In the United States, only 11 per cent of workers are covered by unions.

The author of the TD report, economist Marc Ercolao, doesn’t believe these union wage pressures will be sufficient to derail the Bank of Canada’s efforts to achieve its 2-per-cent target. But he does think those pressures will make the task take longer.

“It will be one source preventing inflation from dropping faster,” he concluded.