Focus

August 05, 2022 | 14:16

Workers Wanted: Demand, Demographics and Disruption

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Priscilla Thiagamoorthy

Economist
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Priscilla Thiagamoorthy

Economist
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Feature

Workers Wanted: Demand, Demographics and Disruption

A shortage of workers faces us at almost every turn this summer. From help wanted billboards, to clogged airports, to restaurants with limited hours, to a strained health care system, the common theme is a pronounced difficulty finding qualified workers—or even someone with a pulse. What first started as a surge in U.S. job openings has clearly spread to Canada, with the 1 million vacancies now just outnumbering the official number of people counted as unemployed—a first, and absolutely meeting the definition of full employment. While a marked slowdown in the economy will cool conditions, the mismatch between supply and demand is so extreme that widespread shortages are likely to persist in many sectors. What has been the biggest force behind this extreme situation, and what are the medium-term implications?

Let’s start with some level-setting facts for the Canadian job market:

The unemployment rate is now just 4.9%, the lowest since 1970. There are just 1.0 million people counted as unemployed, the lowest since 1981 even as the labour force has since grown 60%.
At the same time, there are more people employed than in any prior year. Even with the recent step back, employment is still up 2.2% from the pre-pandemic peak (or 420,000 spots), a notably firmer performance than in the U.S. (Chart 1). The employment rate averaged 61.7% in the past three months, nearly matching the three months prior to the pandemic.
The participation rate for those 15 and over has dipped to 65.0% in the past three months, down from 65.5% three years ago. However, that downward drift is in line with the gradual descent in the pre-pandemic years, and it reflects a rising share of the population in the 65+ category. The part rate for ages 15-64 has in fact risen from pre-pandemic levels, and has hit an all-time high in the past year. And, the rate is far above the similar U.S measure, which has only now returned to pre-pandemic levels (Chart 2).
Wages are beginning to stir, but not nearly at the same feverish pace as U.S. trends.

The key takeaways from these facts are that while the job market is exceptionally tight, it is not due to sudden drying up on the supply side—to repeat, employment is well above pre-pandemic levels, as are prime-age participation rates. One critical point to drive home is that job markets globally were already very tight in the months leading up to the pandemic; for example, both Canada and the U.S. reported multi-decade lows in jobless rates in 2019, as did the U.K. and Germany. Prior to the pandemic, one trendy theory was that new technologies, such as AI, were going to lead to a job-loss crisis—the rapid return of extraordinarily tight labour markets has made a mockery of those concerns.

But what about that ongoing dip in the overall participation rate—does that confirm that a Semi-Great Resignation is unfolding in Canada? The part rate for those 15 and over peaked as far back as 2003 (at 67.6%) and has been grinding lower since then, to just below 65% now. It is critical to note that this ongoing slow decline is almost entirely a function of underlying demographics—that is a rapidly rising share of the population in retirement age groups—and less to do with people exiting the labour force for other reasons.

A variety of indicators can pound this point home. First, Table 1 shows how participation rates in almost every 5-year age cohort has risen in the past three years (we looked at non seasonally adjusted data for Q2 versus the same quarter in 2019). While the overall part rate dropped 0.5 percentage points in this period, not a single age group fell by that much—in fact, only two groups even saw a dip, those 20-24 and those 70 and over. The decline in the overall rate is due to the changing composition of the population, as a swell of people are moving into the 60-64 and 65-69 age groups; and note the steep decline in part rates as workers move into these groups. This is a function of the baby boom peaking just over 60 years ago (Chart 3), which in turn is driving down the overall part rate; this (natural aging) effect has drawn roughly 260,000 workers from the labour force since the start of 2020.

While this demographic drain on the labour force was coming at us full speed, the pandemic appears to have created at least some additional disturbance through earlier retirements, lifestyle change and job switching. Consider that the number of people reporting they left their job for retirement in the past year pushed near 300k by the middle of 2022, which is almost 40k above the baseline seen in the five years pre-COVID (Chart 4). While upward drift might simply just reinforce the demographic shifts discussed above, there are also plenty of anecdotes about near-retirement age workers pulling those decisions a few years forward—a trend which seems to have gathered steam since the economy began to re-open roughly a year ago. Meantime, around 120k have left because of personal or family reasons, which is almost 20k above pre-COIVD norms. We’ve heard about families moving out of big cities, adopting new ways of working, and changing careers. While these do look like legitimate factors, they are still small in comparison to broader demographic forces.

Immigration has been another issue for the labour force through the pandemic. Some industries that rely heavily on nonpermanent residents (think construction, hospitality and various other services) are facing acute shortages. And, while nonpermanent resident flows have turned up to 65k in the year through 2022Q1, that is about 130k shy of the pre-COVID rate (students would be part of that tally too, but many of them also work). That said, total net immigration flows are coming back strong, at 451k in the latest four quarters (Chart 5). So, turning off the immigration taps during the pandemic certainly hurt labour availability, but those flows are quickly returning.

Finally, there are two sides to every market (supply and demand), and the reality is that there is an incredible amount of labour demand, a consequence of running the economy hot. Based on the Bank of Canada’s Business Outlook Survey, the share of firms planning to increase hiring has trended at record levels, and almost twice historical norms. It’s no coincidence that the surge in job vacancies precisely coincides with the surge in hiring intentions (Chart 6). In fact, one could argue that the vast majority of job vacancies is because of overheated demand, not a lack of supply—and that’s a belief that even the Bank of Canada has now adopted in their recent communications.

Where does this all leave the labour market? In the short term, excess demand pressure witnessed in areas like housing and consumer goods spending has also been evident in the job market. In order to rebalance the market and keep wage (and inflation) pressure in check, the Bank of Canada will continue to tighten through the remainder of this year—we look for another 100 bps of cumulative tightening by year-end. But, as the sharp increase in interest rates eventually cools the demand side, job vacancies should ease and the unemployment rate should edge higher by Q4 and through 2023. Longer term, the demographic drag on labour supply will persist and weigh on potential growth, especially in areas where immigration and younger workers can’t neatly backfill job openings because of skills mismatches (think a lack of skilled trades in, say, construction that were common among the Baby Boom cohort). And, even if the job market eases somewhat in the year ahead, we believe the unemployment rate will remain structurally lower than in recent decades.