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Economic climate and inequality

| December 26, 2011

The December issue of the quarterly Economic Climate for Bargaining publication I produce is now online. This issue has a number of pieces on issues of inequality, including:

-  Rising inequality is hurting our economy
-  Labour rights, unions and the 99 per cent
-  Canadian economy bleeding jobs; public sector cuts to intensify
-  Recession and cuts hit Aboriginal and racialized workers hardest

It also has sections with summaries of Canadian and provincial forecasts of main economic indicators, and discussions of developments in inflation and wages increases by major sector and province. It picks up on a number of discussions that have taken place on this blog.

The final figures aren't in yet -- and there are different ways of measuring it -- but it looks like real wages will likely decline by the greatest amount since 1995.

A number of relevant reports came out after this publication went to translation. These include:

-  Mark Carney's recent speech where I was heartened to see him emphasize that the problem we face is one of prolonged deficient demand. (It was also interesting to note that one of the rationales cited for a lower than zero inflation target in the Bank of Canada's Background document on renewal of the inflation target was it could provide workers with real wage gains when nominal wages are sticky.)

-  The IMF report on Canada published last week also raises concern about overvalued house prices and the impact a correction would have on the economy through the wealth effect. I wrote a piece on this in the Economic Climate publication four years ago. At that time, my estimates were that Canadian real estate was overvalued by about 20 per cent or $500 billion: with a housing wealth effect (MPC) of 6 per cent as estimated by the Bank of Canada, that means that a correction would reduce GDP by about 2 per cent. The more sophisticated calculations in the IMF report are that house prices in Canada are overvalued by about 10 per cent and that the MPC related to housing wealth is 4.3 per cent. As a result they report a smaller impact on GDP.

-  It is also good to see Don Drummond has an open enough mind to now issue a mea culpa about the economic policies he implemented and espoused for years, summarized just five years ago in his Economists' Manifesto for Curing Ailing Productivity Growth. At that time, he said there there was broad consensus among economists for those policies. I suppose he wasn't reading this blog.

This article was first posted on the Progressive Economics Forum.