Unravelling the Canadian Labour Market's Dance with Inflation, Monetary Policy, and Economic Trends
Every month, Statistics Canada releases the Labour Force Survey, providing insights into the Canadian labour market. These figures are invaluable for understanding the economy, especially during Canada’s ongoing economic turbulence since the end of the pandemic. Employers must understand the supply and demand for labour and its relation to wages so their businesses can be adequately staffed and operate profitably. Central banks and governments must make critical monetary and fiscal policy decisions to counter not-so-transitory inflation arising from direct stimulus during the pandemic. Finally, investors need to make informed decisions by understanding how the labour market and inflation figures affect the Bank of Canada’s (BoC) monetary policy decisions, which influence the probability and timing of a potential hard landing in the economy, where interest rate hikes lead to a recession. So, how is the Canadian labour market linked to inflation and current economic trends, and how is it responding to tighter monetary policy?
The Canadian Labour Force Survey
Statistics Canada conducts its survey on a representative sample of the civilian, non-institutionalized Canadian population aged 15 and older and has data for each province and age group reported monthly. Based on these characteristics, the Labour Force Survey includes estimates for the total population, total labour force, total employment (broken down by full and part-time workers), and total unemployment. Furthermore, the survey calculates the monthly employment, unemployment, and labour force participation rates.
In June 2023, total employment in Canada grew by 60,000 employees since May, with over 100,000 new full-time hires working more than 30 hours per week; meanwhile, employment in part-time jobs fell. Within the past year, Canada has also been characterized by a persistently low unemployment rate and record immigration (see Figure I). These trends indicate that Canada’s labour market is tight because the demand for labour exceeds the supply. To delve deeper, we must understand what has led to these phenomena in the labour market, and what it means in relation to inflation, wages, and future monetary policy.
Figure I
The Impact of Stimulus and Loose Monetary Policies on the Labour Market
The tight labour market reflects a robust rebound in economic activity from previous lows during the pandemic driven by counter-cyclical fiscal policy in the form of sizeable and direct pandemic stimulus aimed at individuals, families, businesses, and provincial governments. Furthermore, interest rates have been persistently low since the 2008 financial crisis and hovered at 0.25% for almost two years between 2020 and 2022, which has helped households acquire cheap mortgages and businesses affordable loans.
The enacted policies have certainly helped spur demand. A TD Economics report estimated in 2021 that households alone accumulated roughly $300B in excess savings, of which $80B were new personal deposits. The bank’s estimates attributed the changes to a $190B increase in savings and chequable deposits and a $110B decrease in fixed-term deposits, meaning households became more liquid during the pandemic.
As excess liquidity began dispersing during a period of high consumer confidence immediately preceding the pandemic, demand for goods and services increased, prompting businesses to raise prices causing inflation. Higher spending also caused companies to hire more workers to fulfill supply, leading to higher employment rates, incomes, and wages.
Fears of a wage-price spiral phenomenon initially mounted in Canada when 155,000 Public Service Alliance of Canada (PSAC) employees went on strike in April, protesting a decline in their real wages and trying to secure more beneficial work arrangements, including work-from-home. As reasonable as it is for workers to demand their purchasing power back, some are worried that the PSAC agreements might be the benchmark for other such negotiations. This could initiate a wage-price spiral if prices in the broader economy rise to match the wage increases.
At the end of April, 120,000 PSAC employees agreed to a 12.6% compounded wage increase effective retroactively between 2021 and 2024. The other 35,000 employees of the CRA represented by PSAC reached a tentative agreement on May 1.
Other strikes are also taking place across Canada and are overwhelmingly expensive and disruptive. On July 1, 7,500 port workers in British Columbia, represented by the International Longshore and Warehouse Union (ILWU), went on strike after rejecting a tentative four-year wage deal. The strike was estimated to be costing Canadians $500M daily as essential commodity exports are blocked from exiting the port. WestJet, a Calgary-based airline, deferred a strike at the eleventh hour on May 16th, 2023, ahead of the Victoria Day long weekend, after cancelling 200 flights. Metro grocery store workers in the GTA also went on strike in late July.
The Role of Immigration in Labour Supply and Economic Recovery
That is partly why the Federal Government has been letting a record number of immigrants into Canada, roughly one million immigrants for the year ending December 2022. The annual figure is on par with the nearly one million immigrants who became U.S. citizens that same year, the third highest tally on record in their country, though a much larger proportion of the Canadian population to begin with.
Immigration, though sometimes inappropriately blamed for contributing to inflation, has been adding to the labour supply in Canada and is helping dilute excess savings across a more extensive system. While it is true that immigrants do bring their demand into the economy, the BoC Chief, Tim Macklem, has stated he believes their impact is “roughly neutral” after their supply and demand pressures are netted out. It is easing pressure in the labour market, though applying intense strain to infrastructure and public services, especially in Eastern Canada.
The Immigration Levels Plan from the Minister of Immigration is budgeting for 400,000 and 500,000 new permanent residents annually until 2025, alongside a revolving door of eligible visitors, students, and temporary workers, which make up total immigration. Canada’s high immigration also addresses long-term challenges to the Canadian economy whereby, in the year 2050, two-and-a-half working-age Canadians will pay taxes for every retiree.
Canada’s Persistently High Inflation and Low Unemployment Rate
Currently, the BoC is inflicting higher rates on the economy to bring the inflation rate in Canada back down. A 2% inflation rate is desirable by making inflation low, stable, and predictable. The core consumer price index (CPI) measures inflation by taking the weighted average of what consumers pay for a fixed basket of goods; it peaked in June 2022 at 8.1%, though fueled in part by rising energy and food costs due to the war in Ukraine, since CPI without them was almost 3% lower at the same point in time.
In June 2023, many predictions for inflation were beaten when 2.8% CPI was reported. The figure was the lowest in the G7 and has been achieved by significant interest rate rises, now at 5%. However, an increase to 3.3% inflation in July is troublesome and reaffirms the bumpy road ahead.
Thankfully there is some easing in the labour market, though not enough to say inflation will be tamed yet. Current interest rates have only raised the unemployment rate for a second month in a row to 5.5% in July which is still comparably low to historical standards. Meanwhile, the unemployment-to-job vacancy ratio has come down from a 2020 high but reflects less new job vacancies rather than increasing unemployment, suggesting the Canadian economy will continue to observe high consumer spending in the short term, which is bad news for inflation.
Unemployment to Job Vacancy Ratio
Figure II
Looking Forward
The BoC is trying to balance what’s good for consumer spending, incomes, and growth while bringing inflation back to the target 2%. Interest rate changes take many months to come into full effect as all types of loans are refinanced at higher rates. If the BoC tightens monetary policy too aggressively to control prices the economy would slow down more than it needs to.
Labour market indicators are crucial to understand as the Canadian economy navigates the post-COVID environment as it plays directly into incomes, wages, and inflation. There are many external factors too, like immigration, which play into the figures. In July, the Canadian economy shed an unexpected 6,400 jobs and the unemployment rate has risen for the third consecutive month. Although the figures don’t sufficiently indicate inflation is going to brought back under control, the BoC may prefer to draw out its timeline for reeling inflation back to 2%, or face even more severe consequences if the Canadian economy experiences a recession.