The effects of tax increases on negotiated wage increases in the Canadian private sector

Abstract

The major objective of this study is to estimate the short-run inflationary ‘supply-side’ effects of increases in sales tax rates and income tax rates on Canadian negotiated wage rates. Empirical results are based on an econometric analysis of 867 COLA wage contracts and 1662 non-COLA wage contracts signed during the 1979 to 1992 period in the Canadian private sector. No statistical evidence is found to show that the substantial increases in the average rate of income tax in Canada during this period led to larger negotiated wage increases. On the other hand, it is found that union workers were able to negotiate wage increases to offset part of the increase in consumer prices attributable to increases in sales tax rates. Given a 1% increase in the CPI directly attributable to sales tax increases, non-COLA contracts provided a 0.25% wage increase and COLA contracts provided a 0.75% wage increase. The 6.4% increase in the Canadian Consumer Price Index directly attributable to sales tax increases during the ...