Home Economy The persistent labor shortage may turn out to be a bittersweet victory for workers

The persistent labor shortage may turn out to be a bittersweet victory for workers

by SuperiorInvest

Workers will get back a bigger piece of the pie, but will they be better off than when wages were suppressed?

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Record job vacancies show that jobs are about to take revenge. Victory can be bittersweet.

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The owners and bosses have mostly had it their way for three decades. Wages and salaries peaked in the 1970s at about 50 percent of Canada’s gross domestic product. They have generally declined since then, falling to 42.4 percent in the second quarter, the lowest since 2005, according to Statistics Canada.

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We know roughly why this happened. Union militancy ran up against the political opposition faced by Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States in the 1980s, women’s economic participation rates accelerated dramatically, and China joined the World Trade Organization in 2001, introducing North America , Japanese and European factory owners to an irresistible supply of cheap labor.

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These changes have been good for profits, but they’ve also been good for prices — after rising to double digits in the 1970s, inflation has been steady around two percent since the early 1990s. We started buying more goods and services than ever before. Household consumption consistently accounted for about 50 percent of GDP until the mid-2000s, and then increased sharply. Household consumer spending was 57 percent of GDP in the second quarter, the highest on record since 1961, according to Statistics Canada.

Whether this was all good for society is debatable. Considerable evidence suggests that the balance may have tipped too far in favor of bosses, a group of digitally native entrepreneurs who happened to be in the right place at the right time, and anyone who happened to own real estate in major cities around 2010. Income and wealth inequality widened , as manufacturing employment fell, fueling the resentment that characterizes contemporary politics; household debt soared as many of us turned to credit to maintain a certain standard of living; and many North American communities have been gripped by an opioid epidemic that is killing more than 20 Canadians a day, compared to eight a day in 2016, according to the Public Health Agency of Canada.

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It is too late for a generation of workers who were unfortunate enough to join the workforce amid a perfect storm of wage-suppressing forces. However, these headwinds are beginning to recede and labor is regaining its traditional share of the economic pie. The average wage offered was $24.05 in the second quarter, up 5.3 percent year-over-year, the largest increase in recent Canadian history. The average was held back by employers in health care and social assistance, where wages offered were only 3.6 percent higher; wages offered in transportation and storage and mining and oil and gas production rose about eight percent, while job postings for management and technology positions offered salaries that were about 11 percent higher than in the second quarter of 2021.

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The average year-on-year increase for workers aged 15 and over since the late 1990s has been about three percent, according to Statistics Canada’s monthly labor force survey. Wages have come off their decades-long ruts due to one of the more notable macroeconomic stories of the pandemic: the rise in job vacancies. In the spring of 2020, everyone was talking about the price of lumber. The reopening brought stories of restaurants operating at reduced capacity because they couldn’t find enough servers, and of renovations that were unfinished because overworked contractors couldn’t be bothered with small orders.

Much of what happened during the pandemic turned out to be ephemeral. Shares of Peloton Interactive Inc. now trade for around $10 compared to around $160 at the end of 2021 and the largest in Canada lumber companies cut production amid falling prices. But acute labor shortages persist. There were one million job openings in the second quarter, the most since Statistics Canada began tracking in 2015.

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Demand for workers has remained strong as the recovery from the COVID recession has been unlike any other. Central banks and governments in the world’s richest countries have responded to the pandemic with monetary and fiscal stimulus that has caused shock and awe. They probably overdid it because the authorities are now trying to get the burst of inflation under control. Calling job vacancies a sign of excess demand, Bank of Canada Governor Tiff Macklem raised the key interest rate by three percentage points from March to September and is likely not done yet. That’s more of a slowdown than occurred in the decade that separated the Great Recession and the start of the pandemic.

Economists at the Royal Bank of Canada think how fast the Bank of Canada is raising interest rates will cause a recession. While acknowledging the possibility, Macklem argues there is a chance to avoid the worst case because companies can simply stop hiring instead of firing people. This would represent a soft landing of excess demand rather than the hard landing that the Royal Bank is predicting.

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However, there are good reasons to think that the high number of labor shortages will remain.

Peloton’s fancy stationary bikes were part of the fad, and sawmills simply needed time to catch up with the demand for lumber. What is happening in the labor market is different. The unemployment rate was rising before the pandemic, as the post-war baby boom that created a surplus of workers is now increasingly retiring. China’s population is also aging, and the productivity gains that came with its meteoric rise over the past few decades are slowing as it becomes an advanced economy driven by consumption rather than exports and investment. There simply aren’t enough workers, even for an economy in recession. This means shortages will persist, keeping upward pressure on wages.

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For the first time in a generation, workers will have bargaining power. Whether that translates into a stronger economy or a better quality of life remains to be seen. Employers accustomed to cheap labor may have been reluctant to pay higher wages, so the unemployment rate may have risen.

Perhaps a bigger concern is inflation. If it persists, workers will seek larger wage increases to offset the higher cost of living. Employers unable or unwilling to invest in becoming more productive are likely to charge higher prices to offset higher labor bills. That would keep upward pressure on interest rates as the Bank of Canada struggles to keep inflation close to its two per cent target.

Workers will get a bigger piece of the pie back, but will they be better off than when their wages were suppressed?

• By e-mail: kcarmichael@postmedia.com | Twitter:

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