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Should businesses raise wages as inflation soars?

André Pratte
André Pratte | Executive Chairman
July 26, 2022 LinkedIn icon

The inflation rate in Canada reached 8.1 per cent in June, a level not seen since January 1983. Those higher prices are putting increasing pressure on households, whose financial situations are growing tighter. In that context, one would expect workers to demand higher wages to compensate for current and expected inflation. What should businesses do?

According to Bank of Canada Governor Tiff Macklem, employers should resist labour and supply contracts based on high inflation expectations. “My one bit of advice is, the high inflation we see today is not here to stay,” Mr. Macklem said during a panel discussion this month held by the Canadian Federation of Independent Business. “So, when you’re entering into longer-term contracts, don’t expect that inflation is going to stay where it is now. You should expect that it’s going to come down.”

Mr. Macklem explained how, according to Economics 101, long-term inflation expectations feed into the price spiral: “Businesses are having trouble attracting workers, are having trouble keeping workers, so they start raising wages and they’ve got strong demand for their products, so they pass those higher wages on to higher prices. Households then face higher inflation. Workers want higher wages to compensate them for higher inflation. Firms offer those higher wages. That gets higher inflation, and you can see this creates a self-perpetuating cycle.”

Although this theory is being challenged (including by U.S. Federal Reserve economist Jeremy Rudd), it is still the dominating view within the Bank of Canada and the Federal Reserve, and therefore it is the view that guides central banks’ policy decisions.

Should businesses follow the Governor’s advice? And how can that be reconciled with the labour shortages now affecting several industries – a situation that is pushing companies to offer better working conditions, including higher wages?

Answering these questions is complicated by the fact that an increasing number of executives are justifiably becoming convinced that their companies must be driven not only by the interests of their shareholders, but by those of all their stakeholders, including their employees (a concept sometimes called “stakeholder capitalism” or “purposeful corporations”).

A stable, motivated, innovative workforce is crucial to any employer’s success. And a company that will not or cannot offer competitive working conditions will have difficulty attracting and retaining the best-qualified workers.

More than money

A Discover poll conducted last year for the Canadian Centre for the Purpose of the Corporation showed that, at the time (May 2021), 42 per cent of employed Canadians were considering a change of jobs or career. Among those, only 6 per cent mentioned compensation as a factor in their desire to change jobs. The most often mentioned factors were:

  • The employer is too focused on profits and does not take good care of employees (36 per cent)
  • Not enough flexibility in work schedules (25 per cent)
  • The employer does not actively foster a work-life balance (24 per cent)
  • The employer is situated too far from home (22 per cent) and does not allow work from home (20 per cent)
  • In other words, Canadians are looking for much more than money when they choose a place to work. And they do have choices.

According to a report published Wednesday by Royal Bank of Canada economists, the labour shortages hampering Canada’s economic growth will be with us for a long time, even if we go through a recession next year. “The root of Canada’s labour crunch predates the pandemic, and will outlive the next downturn as well,” the economists write. “Indeed, a greying population will continue to create disruptions that extend beyond the shorter-run economic cycle.”

As a result, Canadian employers will continue to compete hard for qualified workers. Considering increasing prices, businesses will have no choice but to raise wages. But, although more generous compensation will be in order, companies may at first focus on non-wage working conditions. They will do so to protect their bottom lines, but also because they know many of today’s young workers prioritize work-life balance.

That said, if the Bank of Canada is wrong and high inflation and interest rates persevere, many Canadian workers will find themselves in very difficult financial situations. It will be in businesses’ interests to help their employees face this challenge. That does not mean giving in to all their demands; a company needs to grow and remain profitable. The Governor’s advice does provide a guideline: wage increases should be based on current inflation, not future scenarios based on hypothetical inflation expectations.

The return of inflation makes our times very challenging for businesses. One way to navigate the rough seas is to remain focused on a strong and clear purpose – the company’s raison d’être beyond generating profits. This means, among other things, taking good care of employees.

This article first appeared in the Globe and Mail on July 24, 2022. Read more >

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About the author:

André Pratte | Executive Chairman
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The Honorable André Pratte is a Principal working out of Navigator’s Montreal office and Executive Chair at the Canadian Centre for the Purpose of the Corporation (CCPC). André assumes these roles after a successful career as a journalist spanning nearly 40 years.  Most of this time, he worked for La Presse, Canada’s foremost French language newspaper. From 2001 to 2015, he was the paper’s Chief Editorial Writer and was part of the company’s management team.

In 2016,  André was appointed to the Senate as an independent Senator. Disappointed by the partisanship that still dominated the Senate, he resigned from this position in 2019.

In 2022, André received an MBA from the Isenberg School of Management at the University of Massachusetts.  Earlier in his career, he had studied economics at McGill University and received a B.A. in political science from the Université de Montréal.

Besides his journalism career, André wrote several books on history, the media and politics, including a biography of Wilfrid Laurier. He has spent years reflecting on issues such as crisis management, the media’s role in society, the social license to operate, businesses’ purpose, economic development, the exploitation of Canada’s immense natural resources, and climate change.

André also sits on the boards of The Lighthouse – Children and Families and of the Paul Gérin-Lajoie Foundation.