Opinion: Public-sector strike may have lingering economic implications

There’s no question the strike of Canadian public servants is big. At 155,000 workers across 27 federal departments and agencies, it’s one of the biggest strikes in Canadian history.

But is it so big it can throw the Canadian economy off course?

The short answer is, yes.

The longer answer is it depends on how long the strike lasts. And that “off course” won’t necessarily be far, or for long. But this is definitely large enough to make a serious short-term dent in the overall economy. And the dispute could point to some more troublesome longer-term implications.

The 155,000 workers represent about 0.7 per cent of the Canadian labour force; if you consider that about 47,000 of those employees are deemed essential, and therefore remain on the job, the remaining 108,000 who are off the job make up about 0.5 per cent of the labour force.

It doesn’t sound like all that much. But it’s a lot when you consider how much the economy – measured by gross domestic product – grows in a month.

“In a reasonably good month, the economy would only grow 0.3 per cent or so,” noted Canadian Imperial Bank of Commerce chief economist Avery Shenfeld in a research note Friday.

If you remove 0.5 per cent of government spending, service output and worker income, a strike that lasts, say, the better part of a month could easily wipe out an entire month’s GDP growth.

And that’s just considering the direct impact of having 0.5 per cent of workers not at work. The strike could, for example, reduce spending by the households of strikers, disrupt business activity because of the unavailability of government services and interrupt the processing of immigrants and foreign workers. Doug Porter, Bank of Montreal’s chief economist, figures that when you account for those sorts of spillover effects, the strike “could potentially clip GDP by 1 per cent, depending on how long the job action persists.”

The Bank of Canada recently forecast that GDP would increase by 1.4 per cent for all of 2023. Doing the arithmetic, a strike shaving 1 percentage point off GDP would wipe out almost all of the year’s growth.

Or would it? Mr. Shenfeld noted that a strike isn’t like a recession, where there’s a sustained, broadly-based slowdown in economic activity, often with some overarching cause that requires time to sort itself out. The forces of a slowdown in a strike reverse themselves as soon as the strike ends. Consumers and producers of goods and services make up for lost time. Growth bounces back to recover what it lost, and the economy is quickly back on course.

“The Bank of Canada will look past that dent to a month or a quarter,” he said.

But the nature of this strike raises some important longer-term questions about where we’re headed with labour unrest in this country, and that could have broader economic implications.

The steep wage demands (employees at the Canada Revenue Agency, for example, seek an increase of 22.5 per cent over three years) are an indication of just how badly wages have been eroded by inflation over the past two years, as well as the desire by workers to be compensated for what they have lost. We can assume the settlement will be something lower than those demands; nevertheless, this strike may well set a relatively high bar for other wage negotiations over the next year or two.

This strike might be just the tip of the iceberg. Mr. Porter noted that, historically, when the rate of inflation has risen, the rate of work stoppages has surged almost in lockstep.

“Workers understandably seek to catch up to the upside surprise in inflation, while employers rationally seek to hold the line on costs,” he wrote. “That fundamental clash of views can lead to strikes.”

If that historical trend repeats, then we may be in for a lot more labour unrest over the next year or two.

That could have a couple of important effects. First, it implies we could be headed for occasional periods of less-than-optimal output and consumption, as scattered strikes weigh on incomes and output to varying degrees, but generally create a drag on the economy.

Second, should increased work stoppages result in a general trend of higher wage settlements, that could put sustained pressure on inflation – considerably complicating the Bank of Canada’s task of returning to its 2-per-cent inflation target.

So, inflation begets wage demands and strikes, which begets more inflation, and a sputtering economy. If you lived through the 1970s, you’ve seen this movie before.

Not that this is the 1970s, or even close to it. The Bank of Canada has acted swiftly to put inflation back in its cage, and for the most part, it’s working. We have an economy that is operating at full capacity. And, frankly, unionized labour is nothing like it used to be; only 29 per cent of Canadian workers belonged to unions last year, down from 38 per cent in 1981.

Still, there will be a labour consequence to the inflationary spike of the past two years. The impact on the economy for the duration of this particular strike may be just the beginning.