The Decibel - How strong is Canada’s job market, really?

Episode Date: April 12, 2023

For months now, Canada’s unemployment rate has been hovering around 5 per cent – a near historic low. It’s a number that economists are watching closely because they expect it to rise now that the Bank of Canada has hiked interest rates.But it hasn’t. And businesses are still complaining about a shortage of workers. So what’s going on? Economics reporter Matt Lundy explains.Questions? Comments? Ideas? Email us at [e-mail]

So, Matt, you're the Globe's economic reporter, so I feel like you're the right person to answer this question. If you had to describe Canada's labor market, the current labor market right now, in one word, what would it be? Hot. Hot. Yes. Last week, we got the job report for March, and it beat expectations. Canada gained nearly 35,000 jobs. And that's not the only number raising eyebrows. So over the last seven months, we've added nearly 400,000 jobs.

The unemployment rate is at 5%. That's close to a record low. And we're creating a lot more opportunities for a lot more people. Here's the thing. Right now, interest rates are high. And usually when that happens, we expect unemployment to rise. But it hasn't. So Matt Lundy is here to explain what is going on with Canada's labour market. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Matt, thank you so much for joining me again.

Thanks for having me. So the Bank of Canada has been steadily hiking interest rates for the last year, and later this morning, Wednesday, they'll make another announcement, and experts widely expect the rate to remain steady at 4.5%, which is quite high. But I wanted to start off by getting you to explain something to me, Matt, because I always hear that when interest rates go up, unemployment is also expected to rise. So why is that? Yeah, so the Bank of Canada right now is raising interest rates to tamp down demand. So if you think of someone with a mortgage, for instance,

if that becomes more expensive, they're probably going to cut back on maybe travel or how much clothing they buy or going out to restaurants or any number of things. That has an effect on businesses. They might have slower sales growth or even declining sales growth. And in order to maintain profitability

or keep things on a positive track, they have to make some cuts. And sometimes that is labor. Now for businesses as well, they might pause their expansion plans. There might be a hiring freeze so that as new people come into the labor market looking for jobs,

maybe there aren't the same number of opportunities and that can raise unemployment as well. Okay, so that makes sense. If maybe a company is not selling as much, maybe they let go of some of their workforce to even that out. So that's what we expect to have happen. What's actually happened in the last few months with our unemployment rate? We had a bit of a blip last summer, shortly after the Bank of Canada started to hike interest rates, where things sort of flatlined for a bit. And a lot of experts were looking at this saying, okay, we're already seeing the impact of higher interest rates on the economy. But since then, we've had all of these indications that there's quite a lot of health out there. There's a lot of demand. Even though

job vacancies have come down a little bit from their highs, you still have more than 800,000 job vacancies across the economy. Clearly a lot of labor need out there. And really a lot of economists are scratching their heads thinking, how could this happen? Yeah, interesting. So is this a good news story then? From a worker's perspective, I would say it's a very good thing. People are very confident in the labor market right now.

They're very confident in their ability to find a job or to switch jobs right now. So that is a good thing. And one thing that we're also seeing right now is that we're creating a lot of different opportunities for people. So we've seen a significant increase in the employment rate for young mothers. We have an unemployment rate at 9.2% for youth. That is like the lowest we've ever seen pretty much. Statistics Canada has mentioned that racialized groups are seeing huge job gains over the past year. Recent immigrants are working at levels that are significantly higher than just a few years ago.

So a lot of groups who potentially were being overlooked by employers before are able to find work a lot more easily right now. There's a lot of good for the individual here, but our policymakers are pretty concerned. And I definitely want to talk about that because that sounds like it's important. But first, let's address this big question here, Matt. Like what's causing such a tight labor market where unemployment is so low? I think there are a couple key factors that go into it. One is that we are in this sort of high inflation environment that has increased sales for a lot of companies,

bulked up their profits. And any company that is operating in this environment is going to want to seek more profit. And one way to do that is to produce more products and services. And you can make investments to become more efficient, to produce more per worker, or you can simply hire more workers to produce more of those goods and services. The other element of this as well is that we spent hundreds of billions of dollars

on our pandemic response to keep companies afloat during the pandemic. Obviously that was very necessary. We also put a lot of money into helping people with their finances. People were able to save a lot of money over the pandemic, not only because of those pandemic support programs, but because there are fewer places to spend. So households collectively saved more than $400 billion from 2020 through 2022.

But now we're seeing huge pent-up demand still being played out in a lot of sectors. And frankly, a lot of people who, while they're not happy about inflation, are still willing to pay those higher prices. Okay, so when you're talking about the collective savings, like that Canadians have saved, as you said, over $400 billion since 2020, does seem like a lot of money. Is the idea because it was so pent up during the pandemic, like we're just we're ready to spend and kind of have these experiences that we couldn't for so long now. And that's why we're still spending. Yeah, absolutely. We are still seeing quite a lot of demand in restaurants, in travel, international travel. If you look at like spending data for RBC or

Toronto Dominion Bank clients, you can see that there is frankly a lot of exuberance out there and that people on these sort of discretionary things that like the type of things that you would cut back on in a high interest rate environment, people are still spending a lot of money in those areas. Okay. So we've talked a lot on this show about how inflation is making everything really expensive. The cost of living is just so much more these days, right? You're buying groceries, your mortgage, all of these things are costing us more money. So when we're talking about the low unemployment rate, could it also be that just more people are looking for jobs, maybe even taking on second jobs because they just need more money in order to pay for things because everything is so expensive. I've seen several economists mention this, that because of the cost of living crisis that we're going through, a lot of people are being forced

into labor. We're seeing really strong employment rates for people 55 to 64, for instance, people that are getting toward that retirement age. Of course, people are living longer. A lot of people are working longer as well. But, you know, I imagine there are a lot of people who are delaying retirement plans right now, thinking, you know, if I can squeak out an extra year or two of work,

that might be beneficial to me. And yeah, I mean, you're seeing really strong labor participation across the board in so many different spheres of society that I imagine affordability is playing some kind of role there. And when you say labor participation, like, can you just define that a little bit? What exactly are we talking about here? Yeah, absolutely. When we talk about labor market participation, we're talking about basically two groups of people. So people who are working and people who are actively searching for a job. How does how is everything like we're talking

about all these different economic conditions, but how does this actually affect people themselves? Like what has been the effect of this tight labor market on workers? There are potential wage gains here that are pretty good. If you look at average hourly wages in this country, they're growing at more than 5% year over year, which is historically on the pretty strong side. In fact, average hourly wages are growing at a faster rate now than inflation. So we're no longer seeing that erosion in wages that we were for about a couple of years, which is a really positive sign. So if wages are growing, is that because employers essentially need to keep their,

they want to keep their workers so they're boosting their pay? Yeah, it's a really competitive environment, very low unemployment rate. There is a good supply of workers out there, but given all that demand out there, so many job vacancies, and frankly, people who are already tied up

in a lot of jobs, it's going to take much stronger compensation packages to get those new employees or pry people away from other jobs. The strong wage gains, companies are going to be passing those costs onto consumers, right, through higher prices. Bank of Canada officials have been pretty clear that they are somewhat worried about wage growth and how that can transmit to inflation. And they've been pretty explicit that they would like to see unemployment rise in order to get inflation back down. I know that's not going to be a popular thing for people to hear. You know, putting people out of work, you know, it's a terrible thing and there's

real world consequences and financial pain for people. But that is exactly what the Bank of Canada is trying to do right now. We'll be back after this message. All right, so let's dig into the specifics of the labor market a little bit more now. We've talked kind of around the edges of it, but let's look at it directly. First off, we've talked about job number reports. And so when we're referring to that, Matt, what are we actually counting when we talk about job gains? We're talking about people. So often as shorthand, people will say, okay, in March, Canada added 35,000 jobs. What they're talking about is the net change in the

number of employed people in the country. So, you know, just for example, let's say 50,000 people gained employment, 15,000 lost employment. It nets out to 35,000 and it's just people in the end. Okay. And if someone is working two jobs that they're only counted once because they're one didn't. In the labor force survey, which is like our main jobs report, they're only counting people employed, not necessarily the number of positions. So we've had seven months of positive job numbers now. It sounds like there's definitely demand when it comes to hiring. What about the other side of that, though?

Is there a shortage of workers, the country, labor market participants. So they're either working or actively looking for a job. That is pretty much the highest on record. And as well, not only do we have a higher percentage of people who are participating in the labor market, but we have a rapidly growing country as well. So strong population growth combined with more people or a greater proportion of people looking for work does not seem like a labor shortage to me. Yeah. And earlier, we talked a little bit about this, Matt, that you mentioned that mothers with young kids are entering the workforce.

People from different backgrounds are entering the workforce. I guess, can you talk a little bit more about that? Why are we seeing that shift? Tight labor markets can create a lot of opportunities for people who might be overlooked otherwise. In the case of young mothers, it's tough to separate it from the fact that there's also a new early learning and childcare deal that's come into effect. That's already led to a lot of cost savings for people who are in regulated daycare, pretty much. That's the federal government's child care deal that's rolling out now. Yeah, exactly. And part of the idea there is that it would boost labor participation for parents and especially for mothers. And we are very much in the early innings.

So I think it's like somewhat difficult to sort of parse through that and say exactly what is going on with higher employment rates for mothers. How much of that is a tight labor market? How much of that is this deal, which has just recently come into effect? How much of it is affordability concerns and having to take on work? Maybe there are more work opportunities for mothers at home, remote sort of work options. So I think it's, you know, time will tell. But certainly the objective here is that it's going to give us this, you know, really like a tailwind of increasing labor supply for years to come. But if participation in the labor market is so high, why are we hearing that there's a shortage? This has a lot to do with the level of demand

that's out there. So prior to the pandemic, we often had around 400,000 or 500,000 job vacancies across the country. By the spring of last year, it was over a million. So we saw like a doubling in labor demand in a really short period of time. So for companies, that looks like a shortage, right? They're demanding so much. And frankly, like we were not going to increase the supply of people or population growth that was like commensurate with being able to fill those jobs.

So, you know, I don't think companies are certainly, you know, lying about this. They just want so many more people in such a short period of time that to them, it's a shortage. I think there's a couple other things at play as well. One is that, as I mentioned, wages are going up. So a lot of companies are looking at what it costs to bring someone in for a job that frankly was pretty cheap before. And so to them, it seems like a shortage of work at the wages they're willing to pay. Clearly, there are some areas where we have demonstrated shortages of

people, right? So when we talk about hospitals and nursing and that sort of thing, like, that is legit. And those are things that policymakers right now are trying to, you know, say, ease immigration rules to get more nurses in and that sort of thing. But, you know, you get into more debatable territory when you talk about lobbying to get easier rules for immigration so that fast food chains can bring in temporary foreign workers. Right. Are those really necessary jobs for the economy? A lot of people would argue they're not. Okay, interesting. So there's maybe a bit of a policy play here for these companies of what they wanna see the government do essentially.

Yeah, so one thing that I think is pretty key here is labor shortages are something that companies talk about all the time. It's not just a recent thing. It's something that companies were talking about in 2016, 17, 18, probably decades ago as well, that there just aren't enough workers. And it is an effective tool for them to get government policy that brings in more people, a bigger supply of labor, and frankly, suppresses wages in a lot of ways too, right? If you have

a bevy of workers who are lining up for that job, you know, that probably means you don't have to recruit nearly as hard. You don't have to offer that much richer compensation package to people. And it's really beneficial to those companies. And the temporary foreign workers program, I mean, that's an interesting one too, because this is essentially people being brought into the country to work these jobs. They are tied to their employer though. They actually don't have the freedom that a regular Canadian worker would have. Their immigration status is tied to that employer. So there's not a lot of flexibility for these individuals that are coming in as well. Yeah, it's a great point. They do not have the same labor mobility or rights that a permanent resident or Canadian citizen has.

So you wind up with employers having more workers who are tied to that specific company. It's tougher for them to leave. If they do leave, they're frankly out of the country. And, again, that's beneficial to companies because you have someone who is perhaps less likely to complain about working longer hours, unpaid overtime, all of these things because a lot of people become temporary residents trying to become permanent residents. And they don't really want to rock the boat necessarily. So we've talked about all the state of everything right now when we're talking about unemployment in Canada, the job market. When you're looking at this, are there any signs that the job market in Canada is from 5% where it is currently to somewhere in the sixes. Even historically, somewhere in the sixes is still, frankly, pretty low. But of course, that would mean a bunch of people losing their jobs potentially, which would be an unfortunate situation. So I don't think anyone really thinks that this is going to persist, that the idea that

we can stay at 5% unemployment, I can't find anyone out there who thinks that this is going to persist, that the idea that we can stay at 5% unemployment, I can't find anyone out there who thinks that's just going to be the status quo throughout this economic cycle and as we adjust to these higher interest rates. What happens if these experts are wrong and the unemployment rate just doesn't increase? There is a thesis, I would say, out there that perhaps we could be heading toward a soft landing in which inflation is basically brought back down to 2%, but without a debilitating recession or rising unemployment, that companies would remove some of their demand through job vacancies, but retain what they do have with their workers. We are making progress on inflation

right now. And a lot of the forecasts are saying that middle of the year, we could be getting to around 3% year over year inflation, which is a massive improvement from about 8% last summer. So who knows, maybe we can get through this with minimal damage. Matt, it's always great to talk to you. Thank you so much for being here. Thank you for having me. That's it for today. I'm Maina Karaman-Wilms. Our producers are Madeline White,

Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Cheung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.