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A Stable 4% Inflation Could Get Canadians One Half Million More Jobs

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  • Pierre Fortin

Abstract

The Inflation-Control Agreement between the Government and the Bank of Canada is reviewed and renewed every five years. In this paper, I propose that the upcoming 2016 agreement increase the inflation target by 2 percentage points, from the current 2% to 4%. I first note that the room to stimulate economic activity and employment when the Bank of Canada judges that it is needed has narrowed dangerously in the past 25 years. I argue that the only fully effective means of freeing the Bank from the operational straightjacket into which it has fallen is setting the inflation target at 4% instead of 2%. I then report of evidence that the strong resistance of Canadian employers and employees to money wage cuts generates a significant permanent trade-off between inflation and unemployment at the macro level when inflation is less than 5%. Combining these two strands of observations, I conclude that moving to 4% inflation would generate about one half million more permanent jobs for Canadians and, over time, add some $50 billion per year to domestic income.

Suggested Citation

  • Pierre Fortin, 2016. "A Stable 4% Inflation Could Get Canadians One Half Million More Jobs," Cahiers de recherche 1604, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1604
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2016/CIRPEE16-04.pdf
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    References listed on IDEAS

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    Cited by:

    1. Miles Corak, 2016. "`Inequality is the root of social evil,' or Maybe Not? Two Stories about Inequality and Public Policy," Canadian Public Policy, University of Toronto Press, vol. 42(4), pages 367-414, December.

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    More about this item

    Keywords

    Inflation target; zero lower bound; anchoring of expectations; downward nominal wage rigidity; Bank of Canada; inflation-control agreement; monetary policy.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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