The economic shock of the pandemic inevitably caused a lot of the economic irregularities such as spikes in unemployment, acute losses in productivity coupled with short episodes of increased spending, and unstable price changes experienced in Canada and around the world over the past two years. In particular, this instability has enabled record profiteering under the guise of reacting to inflationary pressures.
Price inflation is a phenomenon of economic growth in a capitalist economy–an indicator of more activity being added to an economy. Typically, this means the value of goods and services increases, and under normal circumstances, the price of labour in the form of wages rises too. In the context of the COVID-19 pandemic in Canada, however, the price of everything else has increased at an accelerated pace while the price of labour has not kept up. While others have rightly pointed to corporate profiteering adding fuel to the pandemic’s inflationary fire, stagnant real wages (a measure of wages adjusted for inflation) have also contributed to the affordability crisis and cannot be ignored.
The consistent gaps between Canada’s inflation rate and wage growth rate since the start of the pandemic reveal much about today’s affordability crisis.
These trends come crashing down as CERB is removed and low-wage workers return to jobs. During this time, many workers returned to jobs with lower wages than before while the inflation rate blew past the Bank of Canada’s target rate of 2 percentage points. Since the summer of 2021, wages have not kept pace with inflation and a sustained wage-inflation gap has brought the cost of living to new crisis levels. As the negative gap between wages and inflation persists, the real wage and purchasing power of the working-class is weakened as the price of work is kept low.
In recent months we have seen the Bank of Canada use old-school monetary policy to raise interest rates in a bid to reduce inflation, primarily focused on housing sector prices that make up an increasingly unaffordable part of the consumer price index (CPI) basket. There are some indications that this has helped to cool prices in the buyers market, though not enough to make housing truly affordable and has been accompanied by increases in rental market prices. Furthermore, it is a policy tool with limited effects on fighting unstable energy prices and grocery store profiteering.
This policy choice can also lead to stagnant wages, a higher unemployment rate, and greater inequality, especially when interest rates are increased without increased public investment. After more than two years of being hailed as heroes through the pandemic, healthcare workers wages have been left behind, even with some nominal wage growth in other sectors. How are we supposed to staff hospitals and clinics if healthcare workers can’t even afford groceries due to falling real wages?
Unique from previous recessionary episodes is the historically low floor for interest rates that we saw after the 2008 recession and the initial months of the pandemic. As interest rates are raised to cool inflation, will governments use the still comparatively low rates to make investments and ward off the negative effects of an increasing price for money? Using monetary policy alone to tackle some CPI indicators is not enough. Without redistributive policies, monetary policy alone can be detrimental to employment and wages. In addition to tackling profits through windfall and wealth taxes to fight price inflation everywhere else, we need to increase the price of labour. Governments must raise minimum wages to keep up with inflation, invest in decommodified housing, empower unions to defend workers' wage bargaining rights, and ensure healthcare workers are not left behind after years of fighting on the pandemic frontlines.