Oct 11, 2023
Rising wages may not be inflationary: Stephen Poloz
, BNN Bloomberg
Shoe is about to drop on the wage front
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Workers’ demands for increased wages may not necessarily drive inflation higher as other dynamics could boost productivity, leaving room for economists to rethink how they interpret labour data, according to former Bank of Canada governor Stephen Poloz.
In a LinkedIn post on Tuesday, Poloz argued that growing income inequality is “distorting” traditional economic relationships. At some point, he said, worker wages must rise enough to stop the decline in their share of total income.
“But whether this proves inflationary or not is not clear,” he wrote, arguing that factors such as population trends and technology may offset the risks, as can “rising productivity and/or declining profit margins.”
“Population aging means a structural shortage of workers, so wages must rise; aggregate profit margins stop rising or even decline as firms pay higher wages,” he wrote.
WAGE DEMANDS
Wage growth came in rose to 5.3 per cent in Statistics Canada’s latest jobs report and higher wages have been a consistent demand from Canadian labour unions negotiating for new contracts this year.
Ford Motor Co. workers voted to ratify a new contract last month that will see general wage increases of 15 per cent over three years with the agreement expected to set a precedent for talks with other auto companies.
Many economists have raised fears that higher wages will put upward pressure on inflation, making it more challenging to bring inflation back to a manageable level.
But Poloz suggested that this commonly held view among economists may not play out as expected this time, as the economy goes through a period of change.
One way to look at the possible offset of wage increases is to factor in population dynamics and new technologies such as artificial intelligence, Poloz suggested.
“The Fourth Industrial Revolution enables companies to digitize their operations to cut costs and deploy robotics and AI to boost workers' productivity,” he said. “As this happens, profit margins get restored, all without adding to inflation pressures.”
He called for a broad view of economic indicators as people try to make sense of the current landscape.
“The point is, it is important to allow for more than one interpretation of the macroeconomic data, especially at a time where standard economic models are certain to struggle to explain what is going on,” he said.
In a LinkedIn post on Tuesday, Poloz argued that growing income inequality is “distorting” traditional economic relationships. At some point, he said, worker wages must rise enough to stop the decline in their share of total income.
“But whether this proves inflationary or not is not clear,” he wrote, arguing that factors such as population trends and technology may offset the risks, as can “rising productivity and/or declining profit margins.”
“Population aging means a structural shortage of workers, so wages must rise; aggregate profit margins stop rising or even decline as firms pay higher wages,” he wrote.
WAGE DEMANDS
Wage growth came in rose to 5.3 per cent in Statistics Canada’s latest jobs report and higher wages have been a consistent demand from Canadian labour unions negotiating for new contracts this year.
Ford Motor Co. workers voted to ratify a new contract last month that will see general wage increases of 15 per cent over three years with the agreement expected to set a precedent for talks with other auto companies.
Many economists have raised fears that higher wages will put upward pressure on inflation, making it more challenging to bring inflation back to a manageable level.
But Poloz suggested that this commonly held view among economists may not play out as expected this time, as the economy goes through a period of change.
One way to look at the possible offset of wage increases is to factor in population dynamics and new technologies such as artificial intelligence, Poloz suggested.
“The Fourth Industrial Revolution enables companies to digitize their operations to cut costs and deploy robotics and AI to boost workers' productivity,” he said. “As this happens, profit margins get restored, all without adding to inflation pressures.”
He called for a broad view of economic indicators as people try to make sense of the current landscape.
“The point is, it is important to allow for more than one interpretation of the macroeconomic data, especially at a time where standard economic models are certain to struggle to explain what is going on,” he said.
