General Wage Increase (GWI) Proposal Explained

While the parties have agreed on many issues there are a number of issues still in dispute. On some of these issues the parties are likely to engage in further discussion that might lead to resolution, others will have to be decided by an Arbitrator. Please note that any items agreed to at the bargaining table will not be implemented until the interest arbitration is complete. This is the tenth in a series of blog posts to discuss both the matters that have been agreed to and those that are still in dispute, and the second dealing with matters still in dispute.

Price Inflation

The purpose of the general wage increase (GWI), as Arbitrator Taylor put it, is “to keep pace with inflation and the general state of salaries elsewhere.” [2013 arbitration decision, UBC vs UBCFA, paragraph 111, page 51]. The Collective Agreement Part 1, Article 11.02eii)actually refers to two different price inflation rates: changes in the Vancouver and Canadian Consumer Price Indices. However for purposes of analysis and prediction it is sufficient to look only at a single index. We explain our proposed general increase below.

All Consumer Price Indices tend to move together, and any deviations in rates of change are inherently short term and unpredictable. This point is illustrated by comparing the Canadian, BC, and Vancouver inflation rates over the past 35 years or so, in Figure 1. The horizontal black line is set at 2%.

Source: Statistics Canada. Table 326-0020 – Consumer Price Index (CPI), 2011 basket, monthly (2002=100), CANSIM (database). (accessed: 2015-02-08)

The inflation rate in Canada, and in every province and city in Canada, is a product of the Bank of Canada’s monetary policy, which in turn is determined by the Bank of Canada’s inflation target rate. Since 1991 the target range has been 1 to 3 per cent, with the Bank’s monetary policy aimed at keeping inflation at the 2 per cent target midpoint. The inflation-control target was adopted in 1991 and most recently has been renewed to the end of 2016. Figure 1 demonstrates how effective the Bank’s targeting policy has been in achieving its 2% target.

While short term deviations do occur, they are largely unpredictable, but the Association’s view is that, while forecasting inflation rates over the next few years, the only reasonable prediction is that inflation, in all jurisdictions, will average 2% per year.

The general state of salaries elsewhere

In terms of “the general state of salaries elsewhere” the Collective Agreement (Part 1, Article 11.02eiii-iv) actually provides two comparators. The first is “changes in British Columbian and Canadian Average Salaries and Wages.” This acknowledges that our wage increases should keep pace with wage inflation generally. The second is “wages and benefits” at comparable universities. This acknowledges that our wage increases should keep pace with wage increases generally, but also particularly with wages at other universities.

Wage Inflation, measured by increases in average weekly wages, tends to be higher than price inflation, measured by changes in the Consumer Price Index. Over the past ten years, on average wage inflation in BC and in Canada have been 1.2 percentage points and 1.0 percentage points higher, respectively, than the corresponding price inflation rates. (E.g.; while Canada’s price inflation averaged 1.8% over the past 10 years, Canada’s wage inflation averaged 2.8%.)

It is hard to quantify how much our wages are below the level that would be appropriate for a university of our size and quality. The position of the Association is that our wages should be comparable to those at the University of Toronto. UBC, by pretty much every measure, is ranked second only to the U of T in Canada in terms of international recognition. By contrast, our wage levels are not second highest in the country and our relative position seems to have been slipping in recent years.

The Collective Agreement provides no guidance on how price, general wage inflation, and wages at comparable universities should be weighted, but the implication of the Agreement seems to be that an appropriate wage increase would be somewhere in the middle of these three measures.

Real Salaries

Real salaries are salaries measured by how much actual purchasing power is provided by nominal salaries. Since prices tend to rise by an average of 2% per year (approximately 0.165% per month), once your monthly salary is determined on July 1 of any year the spending power of that salary will start to decline every month until, by June 31 of the following year, your command over goods and services has declined by 2%. If our Collective Agreement had a cost of living adjustment (COLA), salaries would automatically increase each July 1 to compensate for the inflation of the past year. Instead, our actual real wages have exhibited quite a different pattern with GWI sometimes being less than inflation, sometimes for many years in a row, and occasionally settlements being greater than inflation, allowing for “catch-up.” Unfortunately, catch-up is hard to achieve, especially in arbitration.

To visualize the effects of inflation on salaries, we calculated the trajectory of a salary corresponding to a nominal salary of $5,316 per month in June of 1980. After over 20 years of annual GWI (which ranged from 0% to 18% over that period) that nominal salary would have grown to $10,000 per month by June 2002 and $12,545 by June of 2014. By correcting the nominal salary for the value of the Canadian Consumer Price Index (set at 100 in June 2002) we convert the nominal salaries into real salaries. Figure 2 illustrates the actual trajectory of real salaries.

It is obvious that the historic relationship between inflation and GWI can be described as having four phases. The first phase occurs during the high inflation period of the early 1980s when GWI fell far short of inflation. The second phase occurs during the late 1980s and early 1990s when lower inflation, coupled with reasonable GWI held real salary approximately constant. The third phase was the gradual loss of real income in the late 1990s, as a result of six consecutive years of very low GWI. Only the last phase (what we think of as the modern era that starts with UBCFA unionizing in 2000) demonstrates the pattern you would expect, with periods of below inflation GWI being followed by periods of above inflation GWI. Figure 2 also illustrates why it is so important not to allow prolonged periods of below inflation GWI – we will probably never be able to catch up.

To further illustrate this point, in Figure 3 we focus in on the last 7 years and consider the difference between the real salaries we experienced after the arbitration award and the real salaries we would have experienced had we accepted UBC’s salary proposal in the last round. Had we accepted UBC’s salary offer the real salary in this example would be almost $100 per month less than it would be under the actual salary settlement. While this may not appear to be a large loss, it compounds over one’s career, and experience has taught us that it is very difficult to make up these losses subsequently.

GWI Proposals in the Current Round

Currently the Association and the University are at an impasse on the matter of GWI. The Association’s position is for a GWI of 3% on each of July 1, 2014 and July 1, 2015. We propose a two year deal. Keep in mind that the purpose of GWI is to keep pace with inflation and the general state of salaries at other comparable universities. The Association contends, and Arbitrator Taylor agreed, that salaries at UBC have fallen somewhat behind its relative place in terms of academic quality [2013 arbitration decision, UBC vs UBCFA, paragraph 104, page 49]. Given an expected inflation rate of 2% per year, general wage inflation at 3% per year, and the need for our salary levels to be more commensurate with those at comparator universities, we believe a settlement of 3% and 3% is reasonable.

The University is proposing a 5 year agreement as shown in Table 1.

Table 1. University’s Proposed Salary Increases*

*the University proposed three slightly different alternatives. This illustrates their alternative 1.

The University’s proposal works out to a little over 1% per year over a five year period where we can expect inflation of 2% a year. In other words the University has proposed a deliberate and prolonged diminution of real salaries!

To illustrate the difference between the Association’s and the University’s proposals, Figure 4 has projected out real salaries (assuming 2% inflation) generated by each. Under the Faculty Association’s proposal real salaries should rise, by June 2016, to the level last seen in early 2010. Under the University’s proposal real salaries will fall to a level below our historic low of June 2008.

The last round of bargaining occurred during a period of unusually low price inflation in British Columbia, in part because of the HST debacle. In his 2013 Award Arbitrator Taylor found that “the factor of [price inflation] would tend to support an annual increase of 1.5%.” He made this ruling before inflation rates in 2013-14 became known. Inflation did rebound considerably in the second year and his overall estimate was a bit low, but reasonable under the circumstances. He further ruled that wage inflation would “tend to support an annual increase of 2.5%.” His estimate that wage inflation would run 1% higher than price inflation was exactly correct in our view. Arbitrator Taylor then argued that taking price inflation and wage inflation together, these two factors would tend to support an annual increase of 2.0%. However taking into account salaries and benefits at other Canadian universities of comparable academic quality and size brought his final award to 2.5% each year for two years [2013 arbitration decision, UBC vs UBCFA, paragraph 121, pages 54-55].

In our estimation, a price inflation estimate of 2% and a wage inflation estimate of 3% in the current round is appropriate. Given that, and given our need to recapture lost ground against other universities, an overall GWI of 3% is called for this year.