Sam Sivarajan is the founder of The Goals-Based Adviser, a behavioural coaching and consultancy firm working with financial advisers and wealth management firms.
This spring was one long labour negotiation for Canada, it seems. Workers at Canadian National Railway and Canada Revenue Agency reached new deals with their employers. And earlier this month, the public sector strike involving over 120,000 Treasury Board employees was settled. Labour peace can now reign for another four years. Or will it?
The cost of living has soared over the past few years. At the individual worker level, it is completely rational to fight for the best pay package possible. Every one of us would do the same. No one is arguing that there is not growing inequality in society, or a cost-of-living crisis, or that the status quo is acceptable. However, does that same individual behaviour that is completely rational make sense at a larger, or collective, level?
For instance, the recent strikes represented just four of the 29 bargaining units that the Treasury Board, the largest federal employer, negotiates with and apparently another 23 bargaining units have had their collective agreements expire as of Jan. 31 this year. That means that the Canadian public can expect either more strikes, similar pay rises to those given in the recently settled strike, or a combination of both.
What may be wrong with that, you might ask. After all, the rising cost-of-living affects us all. True, but the challenge with setting precedents, such as the recent agreement, is that it sets the standard for all coming negotiations – public sector and private sector. For the public sector, the consumer will pay for these pay rises through higher taxes. For the private sector, the consumer will pay for these pay rises through higher prices.
This isn’t new. Sadly, we have been here before. In the 1970s, rising inflation pushed negotiated wages higher. This, in turn, caused wage bills to increase across the board, and companies responded by increasing prices to consumers. This caused inflation to increase further. This wage-price inflation spiral continued, leading to interest rates of almost 18 per cent in the early 1980s.
No one is arguing against wage increases. After all, we all would like to earn more money. However, we should also look down the road to see what the unintended consequences might be. And should we be solving problems ahead by looking in the rear-view mirror? Yes, inflation was high last year but it is already coming down. What impact do four-year raises based on a short-term inflation spike do to our economy?
Garrett Hardin, in his classic essay The Tragedy of the Commons, described the example of the common pasture used by all the local farmers. Each individual farmer benefits from allowing more of his or her sheep to graze on this pasture, but if every farmer did that, the pasture soon cannot sustain even one sheep. So, what is rational for an individual farmer becomes irrational when all of them do it.
We see this in sports all the time. Aaron Rodgers, four-time MVP and one-time Super Bowl winner with the small-market U.S. football team Green Bay Packers, signed a blockbuster three-year, US$150-million contract in March, 2022. Whether Mr. Rodgers was worth this amount is not the question. The subsequent trade of All-Pro receiver Davante Adams surprised many, as the two were seen as a package deal and had led the team to numerous victories. However, because of the constraints of the team’s salary cap and the enormous contract of Mr. Rodgers, the Packers couldn’t afford to keep them both. Mr. Rodgers then had a subpar season in 2022-23 and even contemplated retirement before eventually negotiating a trade to the New York Jets for the 2023-24 season.
Negotiating a high salary is rational for star players, but it limits the team’s salary cap space to retain other critical players. As a result, these players are often traded to other teams, diminishing the star player’s supporting cast and reducing the likelihood of repeating their initial success. This rational behaviour ultimately harms both the team and the star player in the long run.
We see this in the investment world as well. Allocating a small part of your savings as “play” money to invest in a “hot stock” could be rational, if you have done your homework. However, pouring your entire retirement savings into this stock, no matter how “hot” it is, is almost always irrational. On the other hand, you might choose not to invest in tobacco stocks, even if they have high returns, because you are taking a broader perspective.
Sadly, there are no simple answers. It is said that the Iroquois Confederacy believed decisions should consider the impact on the next seven generations. Such an ideal may not be achievable, but it certainly is instructive. While decisions might make sense in a narrow sense of stakeholders or timeframe, a wider perspective may make the decision less compelling. Each negotiation and decision requires us to choose to what extent we are able and willing to consider the wider implications and the downstream effects. “Peace for our time,” as British prime minister Neville Chamberlain boasted after negotiating the Munich Agreement of 1938, may come at a high price down the road.
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