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According to a report by RBC Economics | Labor shortages could contribute to long-term inflation



(Toronto) A prolonged labor shortage in Canada could fuel faster wage growth and inflation over time, which could necessitate higher long-term interest rates, says a new report Economics published Wednesday.

Wages are rising rapidly in Canada, but so far they are failing to keep pace with inflation, the report noted.

In November, for example, average hourly earnings rose about 10% from pre-pandemic levels, reaching their fastest rate of growth since the 1990s. Inflation, however, was around 12% over the same period.

In 2023, wage increases are expected to be “absorbed by rising prices and the cost of borrowing”, which will reduce disposable income, according to the report.

Yet long-term structural labor shortages could continue to drive up wages over time, potentially contributing to inflation.

“While there is no evidence that higher wage growth did not immediately turn inflationary, this could change over time,” the report said.

“With a shortage of available workers, potential employees will have more leverage at the bargaining table, which, in turn, will fuel faster wage growth. »

There are around 50% more vacancies today than before the pandemic, while the pool of unemployed is 11% smaller, the report said.

To woo staff, employers are increasing pay levels, says the Royal Bank’s economics department.

It’s a scenario that the bank says could “at best slow the rate at which inflation declines and at worst revive it.”

“This could force central banks to keep interest rates above pre-pandemic levels for longer to offset rising prices,” the report said.

Still, the Royal says the labor shortage could be offset by capital spending on productivity-enhancing investments like automation.

“Increasing business productivity, through capital investment, can offset these pressures by increasing revenues and making it easier for businesses to pay higher payrolls,” the report says.

“But in the absence of this improvement in productivity, demand will exceed the available supply of goods and services, adding further inflationary pressures. »

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