June 30, 2022 | 13:27
Labour Markets: Tight is Might for Wages
Labour Markets: Tight is Might for Wages
Canada’s extremely tight labour market is starting to show much stronger wage gains. These, in turn, are primed to contribute to faster inflation, complicating the Bank of Canada’s battle to bring it down.
Last week, fixed-weight average hourly earnings were reported up 6.2% y/y in April, the most in 31 years of data (Chart 1). This wage metric, from the Survey of Employment, Payrolls and Hours (SEPH), is not influenced by shifts in the composition of jobs, which is the case for average hourly wages from the timelier Labour Force Survey (LFS). Earlier this month, the latter were reported up 3.9% y/y in May.
At the onset of pandemic-related restrictions, the growth in average hourly wages spiked to 10.9% y/y in April 2020 as workers in lower-wage occupations, such as accommodation and food services, lost their jobs. A year later, with many of these workers having returned, this wage metric registered a -1.8% y/y reading. Over this series’ 25-year history, the current +3.9% y/y reading sits on the high side of results. Apart from the interval lasting from late 2007 to early 2009 and during 2019, the growth in average hourly wages has never topped 3.9% y/y on a sustained basis.
Now, amid an extremely tight labour market, the question is whether the pre-pandemic peak of 5.0% y/y is also poised to be surpassed. Moreover, if both wage measures had longer histories, perhaps they would also be registering four-decade highs, mimicking what’s happening in the U.S. labour market (Chart 2).
Looking at jobless rates, Canada’s labour market resembles what Fed Chair Powell referred to as America’s “very strong and extremely tight” market. The Canadian unemployment rate dipped to 5.1% in May, below its pre-pandemic lows (Chart 3). It was 5.7% just before the onset but as low as 5.4% in May 2019. Profoundly, this was also the lowest level since the current method for the LFS began in 1976. Although pre-1976 jobless rates aren’t completely comparable, this could be the lowest reading in 52 years, apart from one month in 1974. The half-century mark is noteworthy because the U.S. jobless rate was 3.6% in May, a tenth above its February 2020 mark, which matched the lowest level since 1969. But, despite comparable snugness, U.S. wages have displayed more acceleration than those in Canada, reflecting differential factors influencing labour market demand and supply.
Defining the demand for labour as the amount of filled and vacant payroll positions, U.S. demand rebounded more quickly after the pandemic’s onset than that in Canada (Chart 4). North of the border, restrictions were more onerous and longer lasting. But as soon as they were lifted, even temporarily, Canadian labour demand moved quickly to catch up. In 2021Q4, both markets saw labour demand fully recover to at least its pre-pandemic (2019Q4) level, with Canada slightly outperforming. The underperformance, followed by outperformance, also reflected the initial weakness and subsequent strength in the commodities sector.
Although the demand for labour, or desired employment, has recovered on both sides of the border, the same can’t be said about actual employment. In Canada, payrolls surpassed their 2020 peak at the start of this year (Chart 5). Household-surveyed employment, a tally that includes the self-employed, completely recovered by November 2021. However, south of the border, both measures remain below their pre-pandemic peak, with payrolls under by 822,000 and household employment short by 435,000. At the latest job creation clip, this puts a full U.S. jobs rebound still two to three months away, up to 10 months after Canada accomplished the same feat.
This means relatively more of the rebound in U.S. labour demand was reflected by increasing job vacancies. The vacancy rate, which measures job openings as a share of demand, is another measure of the degree of market tightness with perhaps more relevance than the jobless rate for potential wage pressures. The higher the vacancy rate, the greater the pressure for more competitive hiring practices, such as raising wages, to both attract and retain workers. In the U.S., the job vacancy rate hit a record high of 7.1% in March (data started in 2000), reflecting 11.9 million job openings scattered across businesses both big and small (Chart 6). The NFIB reported a record-high 51% of small business with job openings in May (data started here in 1973).
Canadian vacancy rates are a relatively new statistic; they began in 2015 (with some gaps). Nevertheless, they too hit a high of 5.6% in Q1 after starting to noticeably run up last year like their U.S. counterparts. Monthly (not seasonally adjusted) figures began only in 2020, and April’s advanced further, but this was apparently a seasonal aberration according to official “experimental” data. So, with comparable run-ups in vacancy rates and run-downs in jobless rates along with stronger relative performance for labour demand and employment as a background, the question is begged: Why hasn’t Canada had more U.S.-style wage acceleration? The answer lies on the supply side.
In the U.S., the supply of labour has been more constrained than in Canada. The labour force participation rate, which measures people working or (officially) looking for work as a share of the population, remains well below its pre-pandemic level (Chart 7). In May, it stood at 62.3%, still down by 1.1 ppts. Canada’s participation rate currently stands at 65.3%, only 0.3 ppts below its pre-COVID position.
South of the border, there appears to have been a higher share of people who were working or looking for work before the pandemic who then opted to do neither because of the pandemic, citing caregiving responsibilities and health and safety concerns. The BLS pegs the number at 455,000 in May, which has fallen sharply from the 1.8 million during Omicron’s turn-of-the-year outbreak and 2020’s 9.7 million peak. Additionally, there appears to have been a higher share of previous participants opting for early retirement. Some studies suggest that it can account for most of America’s labour force shortfall.
Meanwhile, one reason proffered for Canada’s stronger labour force and employment rebounds is better crafted pandemic relief measures that kept employers and employees more engaged.
Another indication of the Canadian labour market’s superior supply response is seen in the size of the labour force, which had already moved above its pre-pandemic peak by early last year. Meanwhile, the size of the U.S. labour force remains below its pre-COVID mark. The fact that Canada’s participation rate has not yet completely recovered is a reflection of underlying labour force-aged population growth.
In the year ended May, Canada’s population grew 1.4% y/y, rebounding from the last year’s pandemic-depressed low of 0.8% y/y. With a policy of increased immigration, population growth should soon retest the four-decade high of 1.6% y/y hit in 2019. Importantly, despite increased population growth and immigration, job growth has been strong enough to keep the employment ratio on the rise. By March, it had returned to its pre-pandemic (February 2020) mark of 61.9%, a tenth shy of matching a 13-year high (Chart 8). Meanwhile, U.S. population growth is currently 0.9% y/y, also having rebounded from its pandemic-dampened low of 0.3% y/y during last year. However, the U.S. employment ratio remains more than a percentage point below its pre-COVID level.
Bottom Line: Canada’s labour market is at least as strong and tight as its U.S. counterpart. Although more favourable supply dynamics should keep a lid on the largest wage gains, recent high wage growth readings appear poised to pick up. This will not go unnoticed by the Bank of Canada.
Central banks often talk about inflation as being a process in which higher costs, including wages, are passed on to consumers, particularly when demand is strong. These higher prices then prod workers to demand or seek higher wages, particularly when labour markets are tight, thus propagating the inflation process. For both the Bank of Canada and Federal Reserve, the latest labour market data continue to follow this paradigm, further energizing their policy tightening efforts designed to weaken demand sufficiently to break the cycle.