Most of the federal public servants who went on strike a couple of weeks ago were back at work on May 1, after the Public Service Alliance of Canada (PSAC) reached a tentative agreement with the Treasury Board that will increase the wages of some 120,000 bureaucrats by 12.6 per cent over a four-year period, starting retroactively in June 2021.

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Theo Argitis: PSAC strike may be over, but workers' fight with inflation was already lost Back to video

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So, an increase of about three per cent per year — well above the Bank of Canada’s target of two per cent, but less than the inflation we’ve experienced since the fall of 2021. (The 35,000 PSAC members who work for the Canada Revenue Agency remain on strike.)

The PSAC strike has brought to the fore an important question that needs to be addressed if we’re to collectively move past last year’s painful inflationary crisis: will Canada’s workers ever make up for the lost purchasing power of their wages?

Strikers, like all workers, have a legitimate qualm. With inflation averaging 6.8 per cent last year, 2022 was one of the worst years in decades for real wages. It’s not unreasonable for workers to ask why they shouldn’t be compensated.

The unfortunate answer is that it’s probably already too late. Once inflation surges, the die is cast and the fight lost for labour.

Among the many distortions caused by inflation is that it makes it very difficult to plan — and workers tend to be the last to adjust. After all, there’s a reason why economists describe inflation-induced wage demands as “second-round” effects.

For Canadian workers, the recent episode of inflation is compounded by the fact that few wages — after years of price stability — are indexed. Canadian labour leaders also took at face value projections from economists and policymakers that inflation would be less severe than it actually turned out to be.

The end result was a sharp redistribution of income away from labour. The share of national income that went to corporations, meanwhile, jumped to well over 28 per cent over the past two years, hovering at one of the highest shares in the past five decades and up from 26 per cent in 2019. Governments also did well as inflation fattened their coffers.

It’s tough to cast any blame.

Much of the windfall for corporations and governments came from rising global commodity prices that drove revenue higher for our resource firms. Energy-consuming manufacturers passed higher bills onto customers. With inflation de-anchoring and consumers willing to accept higher prices, some companies simply took advantage of the environment, not knowing themselves what the future would hold.

Governments, meanwhile, were happy to take in the higher revenue at a time when they were dealing with a fast-rising pandemic-related expenditures.

Even workers began to see historically high pay increases. As profits and tax receipts increased, companies and governments increased hiring and bid up wages.

Still, at least over the last two years, those gains have fallen short of the rising cost of living.

Most measures of wages in Canada (there are many) recorded pay increases of about four per cent to five per cent last year, well below inflation. It was the same story in 2021, when wage gains hovered in a range of two per cent to three per cent, below inflation that came in at 3.4 per cent.

The gap was even more pronounced for collectively bargained wages. According to the government’s tracking of wage settlements, unions scored average wage increases of 2.5 per cent in 2022 and 1.9 per cent in 2021.

Will workers eventually make up the difference?

This is largely a political question and will depend on how much power unions hold and want to wield. The economic case is a difficult one.

Demand for labour is slowing quickly as evidenced by recent job vacancy data, and Canada’s economy is gearing down this year as higher interest rates bite.

More fundamentally, real wages are closely correlated with productivity growth. Given productivity in Canada is stagnant, there’s little scope for wages to grow much past inflation for a sustained period of time.

Even wage gains of three per cent that many private sector unions have been scoring in recent months (and was the basis of the federal government’s “low-ball” offer to public sector workers) is inconsistent with the Bank of Canada’s inflation target of two per cent.

As long as the nation’s productivity languishes, the central bank would be wary of any new normal that would see wage increases settle much above its target. Salary increases at the central bank were 1.5 per cent in 2021, two per cent in 2022 and two per cent in 2023 — a pretty strong signal on that front.

This doesn’t mean that workers shouldn’t try to find ways to carve out a bigger piece of the economic pie in coming years from companies and government. Good luck to them.

But the economy is a fully interconnected system and it’s important to keep in mind that there are risks too. Among these are the potential that higher wages stoke price pressures further should companies pass on the cost to consumers, and sticky inflation would only mean workers will struggle to keep real wages positive. It’s a vicious cycle.

The trick is to avoid the start of inflation in the first place and hope productivity somehow rebounds — an unsatisfactory conclusion for many workers right now.

Theo Argitis is managing partner at Compass Rose Group.