It’s past time for a raise for Canadian workers. Productivity is on the rise, and wage increases are needed to keep the economy healthy.

Wages are a fundamental determinant of the standard of living of working families: few workers have significant investment income outside their pensions and governments provide minimal income support except for the elderly.

But policy makers tend to accept the business perspective that wages are a cost and a burden, rather than a benefit. Our ministers of Finance frequently stress the need for international competitiveness, but rarely call for strong wage growth.

The Bank of Canada turns an eagle eye on wage settlements, and is congenitally suspicious that higher wages are evidence of dangerous inflationary pressures.

In fairness, most economists recognize that real wages should rise in line with productivity, as they did from the 1950s through the 1970s to the tune of 2% per year. If wages do not rise with higher output per hour, workers will be unable to collectively consume what they produce. This sets the stage for overinvestment, deflation and recession.

The direct link between rising wages and an expanding market for business has been eroded to some degree by increased international trade. But our economy is still driven mainly by the spending of working families on housing, goods and services, and by public services financed from taxes on wages.

Unfortunately, a large gap has opened up between wages and productivity in the recent period of strong growth and job creation.

Since 1997, productivity - real output per hour in the business sector - has grown by an average of 2% per year, up from 1% in the early to mid 1990s. This is good news. A more efficient economy can provide the resources working people want to go to higher wages, shorter working time, and better social programs.

Unfortunately, while real output per hour rose by a total of 10.5% from 1996 to 2001, real wages hardly rose at all. Adjusting for consumer price inflation, wages of private sector unionized workers grew by a total of 2.2% over the same period; wages of public sector unionized workers rose by just 0.7%; and real hourly wages of all workers actually fell by 1.2%.

This does not mean that working families received nothing from the recovery. It does mean that increased incomes came mainly from more work hours, the result of lower unemployment, more overtime, and higher rates of labour force participation.

What happened to the productivity gains?

There are some technical reasons for the gap. The prices of things we consume have a tendency to rise faster than the prices of the things we produce. And benefit costs have risen a bit faster than money wages, driven by employer health costs and CPP premiums.

That said, worker restraint has produced higher profits and returns to investors. Corporate pre tax profits hit a high of 10.6% of GDP in the 1980s, but rose above 12% in 2000 and are still running at just below 11% of GDP.

While critical of recent corporate excesses, workers recognize that businesses need profits in order to invest and create jobs. But there is a case for stronger wage growth than in the recent past.

Canada is growing faster than the US because of higher levels of consumer spending, fuelled by more jobs and low interest rates. Working families have been taking out bigger mortgages to buy houses, and running up debt on their credit cards.

Household debt now stands at about 100% of disposable income. It is much higher for younger working families who typically hold down two full-time jobs and are working ever longer hours.

They and the consumer economy need higher wages.

(Andrew Jackson is a senior economist at the Canadian Labour Congress.)