Surging inflation over the past year has Canadians on edge. The erosion of purchasing power we notice every time we visit the store or pay a bill is unsettling for everyone and frightening for many. Higher interest rates, as lenders and the Bank of Canada react to inflation, will slow borrowing and spending, and have already sparked talk of a recession. As if that’s not bad enough, experience suggests higher inflation may cause another problem: strikes and lockouts that will be harmful enough on their own but will also worsen the production and supply-chain problems that have contributed to inflation in the first place.
Work stoppages are one of the dismal consequences of inflation that has been largely out of mind since the Bank of Canada began its successful targeting of two per cent increases in the CPI. Low inflation also tends to be stable inflation, which helps to steady economic growth. When inflation is under control, employers can more easily forecast their revenues and understand what competitors are doing. Employees can more easily forecast their cost of living and compare their wages to what’s on offer elsewhere. That makes negotiating labour contracts easier and produces fewer surprises that make people want to re-open contracts part way through.
On the other hand, when inflation is high, it tends to be volatile, and the economy goes through bigger ups and downs. That makes things harder for both sides. Employers’ forecasts of revenue are worse, and the unstable value of money muddles their read of the competition. Employees can get nasty surprises from the dwindling value of their pay cheques and begin to judge their own position with reference to whoever they know of who got a bigger increase most recently. Ups and downs in the job market tilt the field one way, then the other. Labour relations deteriorate.
Notwithstanding recent rumblings in industries as varied as hotels, steel and medical services, labour relations in Canada are still quite good. In 2021, we lost about five and a half days to strikes and lockouts for every thousand members of the workforce. That is the kind of low level we have become used to: days lost per thousand workers has been in the single digits since 2005.
As the two-year averages of inflation and days lost in the nearby chart make clear, however, this happy experience is historically unusual. From 1995 to 2005, when the two-per cent inflation target was newer and less credible, days lost per thousand workers were typically in the low teens. But in the mid-1980s, the Canadian economy typically lost about 30 days of work per thousand workers. And in the high-inflation 1970s, the typical loss was twice that. In 1975 and 1976, our two worst years for strikes and lockouts, they cost more than 90 days per thousand workers.
Our economy is already straining to meet surging demand. The whole world is short of energy and food. Most supply chains are stretched and some are broken. Two years of lockdowns have driven many companies out of business. As the recent threat of a carpenters’ strike in Ontario showed, a resurgence of strikes and lockouts would add to the already eye-popping price increases crimped production is already producing. Unless employers and employees see quick action to bring inflation back down, work stoppages could exacerbate this mismatch of supply and demand and push inflation higher yet.
In one key respect, however, our situation now is better than the last time inflation jumped, in the 1970s. Back then, many explanations for inflation focused on the supposed greed of businesses and workers. Along with accusations and acrimony, that led governments, including Ottawa, to try wage and price controls, which only served to further distort decision-making, exacerbate shortages, and inflame labour relations. This time, we have broader understanding — backed by both the positive evidence of successful inflation targeting, as well as the negative experience of central banks letting inflation reappear during the pandemic — that what really controls inflation is monetary policy.
The key task now is for the Bank of Canada to act decisively to get inflation back to target. If it does, recent rumblings on the strike front will remain just that, rumblings. If it does not, strikes and lockouts may add to our economic woes and exacerbate the very inflation that sparked them.
William Robson is CEO of the C. D. Howe Institute.
First published in the Financial Post.