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Will the massive PSAC strike stoke inflation? Maybe, but it's complicated.

Federal workers want wage increases to keep up with inflation, but their demands could end up rekindling it.

One of the largest strikes in Canadian history began one minute after midnight, when tens of thousands of federal workers walked off the job. They want wage increases to keep up with inflation, but depending on what they ultimately win, their demands could end up rekindling inflation just as the Bank of Canada put a pause on interest rate increases, experts said.

What PSAC wants

More than 155,000 members of the Public Service Alliance of Canada (PSAC), the country’s largest public sector union, began a strike on Wednesday, April 19, after failing to reach a deal with the federal government by the Tuesday deadline. The union said this week that a strike would be justified because its members have been working without a contract since 2021 and more than a year of bargaining had achieve insufficient progress.

“Now more than ever, workers need fair wages, good working conditions and inclusive workplaces,” Chris Aylward, PSAC’s national president, said in a press release on April 18. “It’s clear the only way we’ll achieve that is by taking strike action to show the government that workers can’t wait.”

Most of the strikers work for Treasury Board. PSAC warned that Canadians should expect a “complete halt of the tax season,” disruptions to employment insurance, immigration and passport applications, and slowdowns at border points. (The Union of Taxation Employees, a unit of PSAC, which represents 35,000 Canada Revenue Agency employees and has been bargaining since last year, joined the action.) The last strike of this magnitude occurred in 1991, when 70,000 PSAC workers walked off the job, delaying grain shipments, airplane flights and travel between the border.

PSAC wants a salary increase of 13.5 per cent over three years, retroactive to the expiration of the previous contract. The CRA union wants a 20.5-per-cent raise for its members over three years, plus a one-time increase of nine per cent to bring wages inline with similar public sector jobs.

Why PSAC could stoke inflation

Charles St-Arnaud, chief economist at Alberta Central who previously worked at the Finance Department and the Bank of Canada, characterized the union’s salary request as a “big increase.”

The membership represents only a subset of workers, but the group is large enough to set the tone for wage demands elsewhere. When it comes to unionized workforces, especially in the public sector, what one union does when it’s time for contract renewal has the potential to influence what other unions do when it’s their turn at the bargaining table, St-Arnaud said.

“The question is, will, at some point, other unions start to look at that agreement and base their demands, or what they expect to be getting, based on what federal workers are getting?” he said. “It could be inflationary.”

If more people ask for higher wages, that can sustain the inflationary cycle by increasing consumers’ purchasing power, which in turn stimulates demand for more goods and services and therefore puts price pressures on costs, said Alexandre Laurin, director of research at the C.D. Howe Institute, a think-tank.

But PSAC’s influence likely spreads beyond the public sector. The labour market is tight, so private companies might have to match public salaries to keep prospects from going to work for the government. “In an economy like we have now where the labour market is competitive and tight, then (the private sector) would also have to be competitive, because they’re chasing the same workers, and raise their wages,” Laurin said.

Troubles for the Bank of Canada

Wage growth is one of the contributing factors to high inflation, which first pushed above the central bank’s comfort zone of one to three per cent in April 2021 and remains there. Average hourly wages have been growing at an annualized rate of between four per cent and five per cent for the better part of a year, stoked by record vacancies and the worst inflation in 40 years.

Statistics Canada reported April 18 that the consumer price index increased 4.3 per cent from March 2022, the smallest since August 2021. Earlier this month, Statistics Canada said wages grew 5.3 per cent year-over-year in March, so pay increases no longer are trailing the cost of living — at least at the aggregate level.

Bank of Canada governor Tiff Macklem said at a press conference April 12 that wage increases that outstrip productivity gains tend to be inflationary — and Canadian productivity gains, as measured by output per worker, currently are negative.

Macklem refused to be drawn into a specific negotiation, but he had a message for all employers and employees: the Bank of Canada is determined to return inflation to the two per cent target, so set your expectations accordingly. “Our message is plan for inflation to come back down,” he said.

The Bank of Canada predicts headline inflation will slow to about three per cent by the second half of this year and then drop to about two per cent by the end of 2024. PSAC wants pay increases of 4.5 per cent in each of those years.

A ‘dose of humility’

There needs to be “a large dose of humility” when considering the inflationary impacts of one union’s salary gains because ultimately no one knows yet the size of the increase each PSAC worker will receive, said David Andolfatto, a Canadian economist who teaches at the University of Miami.

Even if there is a ripple effect that influences other wage negotiations, companies in the private sector have the capacity to absorb costs rather than raise their prices. And if higher wages stimulate demand? “That’s something that the Bank of Canada … can control,” Andolfatto said.

Also, PSAC’s demands don’t necessarily crossover to workers in other areas of the public sector, such as teachers or health-care workers, said Armine Yalnizyan, an economist who studies labour trends at the Atkinson Foundation, a charity.

“A deal for the approximately 150,000 workers is something everybody’s going to be watching, but it may not be something that actually influences other types of negotiations because these workers are quite unique and not very large in number,” Yalnizyan said.

‘It’s got to be a big change’

A spokesperson for PSAC said the wage gains they are seeking would be retroactive to when the contract expired in June 2021. If inflation returns to target next year, it wouldn’t impact the agreement they are negotiating at present, the spokesperson said.

To be sure, while the labour market is still tight with the unemployment rate near record lows, signals of an economic slowdown are emerging. Even if PSAC is successful in getting what it wants, a weaker economy could limit the ability of other unions and workers to win the same gains, Laurin said.

The Bank of Canada’s latest Business Outlook Survey suggests employers are finding it somewhat easier to fill positions, said Brendon Bernard, senior economist at job recruiting website Indeed. The changing dynamic in the labour market could mean less bargaining power for PSAC’s members, knocking down some of its demands.

Even if federal and CRA workers get the wage bumps they want or settle for something less, wages are just one of hundreds of items that go into calculating how much everyday prices go up for the average Canadian, Bernard said. “For that to really make an imprint on the numbers, it’s got to be a big change,” he said.

Credit: by: Bianca Bharti

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