Dear Readers,
Is the Bank of Canada driving down the wrong side of the road? And are you and I going to be the collateral damage in this fight to bring down inflation?
If you’ve figured this all out, please help me understand how raising interest rates is supposed to help dampen wage growth when there’s a massive shortage of workers.
On the news broadcasts, the talking heads tell us that wage growth in the services sector is driving inflation.
The most recent numbers say that there are almost 1,000,000 job openings across Canada–the highest I’ve seen in my lifetime.
Wage growth grew by 7.5% year over year to $24.50 per hour. The latest numbers say that there’s 81,000 vacancies for construction workers. 63,000 openings for scientific and technical services.
Human nature being what it is workers will keep leaving one job for another if they can make more money. Wouldn’t you?
In theory, the Bank of Canada (BOC) could crank up interest rates to 6% or 7% (or more?) and still not slow wage growth because there’s simply not enough workers to fill all positions.
If a severe shortage of workers is a large contributor to the underlying cause of inflation, more interest rate hikes may not have the desired effect. Workers can always shop around for more pay.
I had a software engineer client of mine tell me that high demand for high-skilled people in his sector was driving salaries up from $300K to $400K per year.
In the end, the BOC’s decision to increase rates leaves a wake of collateral damage. Individuals and couples not on fixed payments are seeing their mortgage servicing costs rise by $300 a month and $3000 in some instances.
If there’s an underlying structural issue that needs major fixing–like we need more workers and fast–why not make that the focus?
I get that the Government of Canada has announced a plan to bring in 1.5 million new immigrants in the next 3 years. 450,000 are supposed to make Canada home in 2023 alone.
But if the BOC’s goal is to control inflation through rate hikes alone, they’ll need to drive demand through the floor with interest hikes resembling the early 80s.
Do we want to live through the economic mess that comes after? Do we want our kids to live through a stagnant decade with fewer job prospects?
Readers, you may have more insight into this than I do. So I’d love for you to help me understand how rate hikes will bring inflation back to 2% when we’re one million workers short in this country.