Focus

July 19, 2024 | 12:17

Canadian Job Market: “We’ll Be in Touch”

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Art Woo

Senior Economist and Director
Economics

Art joined the Bank of Montreal in 2014. His primary responsibility is analyzing global economic, financial and ... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Art Woo

Senior Economist and Director
Economics

Art joined the Bank of Montreal in 2014. His primary responsibility is analyzing global economic, financial and ... (Read more)

Feature

Canadian Job Market: “We’ll Be in Touch”

Canada’s job market has worked through a significant shock in recent years, and conditions continue to rapidly evolve. In the simplest form, the job market has gone from extremely tight to exhibiting some clear signs of weakness. We explore some of the reasons why, and the implications for policy.

Jobless Rate Flashing Yellow

Canada’s unemployment rate has risen to 6.4% as of June, the highest level (outside the pandemic shock) in almost seven years (Chart 1). That marks a hefty 1.6 ppt increase from the cycle low, and a full 1 ppt increase from a year ago—those are typically moves reserved for recession. The fashionable Sahm rule has also been violated, with the jobless rate now up more than half a percentage point (actually 0.9 ppts) from the past-year’s 3-month moving average low.

There are two interpretations of this. Some will say that while the jobless rate has risen meaningfully, it has done so from historically-low levels that represented a too-tight market. While that’s a fair take, we’d lean more cautious for a few reasons. First, the labour market, and the jobless rate specifically, are notoriously lagging indicators. Indicators that are more forward-looking in nature are suggesting that the softening will continue. Meantime, the reason for the increase is changing from pure labour supply growth to one where firms are more reluctant to hire.

Supply and Demand Rebalanced, or Imbalanced?

Canada’s labour supply was madly catching up to demand through 2022 and much of 2023, but the balance now appears to have swung in the other direction. Total labour supply, as measured by the size of the labour force, has risen by almost 600k in the past year and has been posting annual growth rates north of 3%. That’s a pace of growth not seen in more than two decades, and comes on the back of international immigration, not increases in participation. With the employment rate now down more than a full percentage point in the past year (another recession-like marker), it’s clear that Canada’s job market can’t absorb the influx of people.

Meantime, labour demand growth has fully stalled (Chart 2). After growing strongly through March 2023, combined payrolls and job openings have seen no net growth over the past five quarters, leaving the small year-over-year decline flashing in stark contrast to 3% labour force growth. Deteriorating demand growth is being overlooked because, to this point, it’s showing up in declining job openings rather than outright job loss. Job vacancies have crumbled from more than 1 million at the high in 2022 to less than 600k now; and the job vacancy rate has fallen back to pre-COVID levels.

The more forward-looking Business Outlook Survey is sending the same signal, with firms saying that hiring intentions weakened in Q2 to the low end of the historical range, and reported labour shortages down sharply to near 15-year lows. The intensity of those remaining shortages is at the lowest since 2009. For policymakers, it’s time to focus less on dampening excess demand, and more on preserving current conditions.

Pressure Points

Pressure points still exist in some corners of the job market, reflecting structural imbalances. While the broad job vacancy rate has fallen sharply back to 2019 levels, roughly half of the 20 major sectors remain above, while half have fallen below that mark. Interestingly, some sectors in which one would expect ongoing vacancies do remain high (Chart 3). The vacancy rate in health care, for example, is still almost 2 ppts above 2019 levels. Construction, while off their high as the housing market has cooled, continues to see shortages of skilled labour amid robust building activity. And, some sectors like accommodation & food services, which likely saw permanent loss of labour supply during the pandemic shutdowns, are also elevated.

On the flip side, sectors that are being driven more by cyclical forces, such as real estate (not homebuilding specifically), trade, manufacturing and finance, have seen vacancy rates fall below 2019 levels. Softness in these industries suggests that monetary policy has been tight enough for long enough.

Wage Against the Tightening Machine

Wage pressure remains elevated, which is not surprising given that wages tend to be stubborn, lagging and difficult to turn around. This is especially true when contracts are rolling off from an era of very little inflation (i.e., pre-COVID) to one where inflation has been well above target for a few years. Most traditional wage measures are stuck around the 4% annualized mark right now. That said, forward-looking indicators point to softening wage trends ahead (Chart 4). In the Q2 Business Outlook Survey, wage growth expectations continued to retreat, with the average expected increase now back in the pre-COVID range. These expectations typically lead changes on the ground by about a year, and suggest a cooling in wage growth back toward 3%. The Bank of Canada simply notes that “firms no longer see a need for higher wages to attract or retain workers”.

Bottom Line: Canada’s job market is no longer tight, and continues to soften. The influx of labour supply is not being readily absorbed, allowing slack to build and eventually dampening wage pressure. From a policy perspective, the lagging nature of many labour-market indicators requires us to anticipate, which means rate cuts should continue from here. And, tighter controls on immigration flows, as announced, are looking even more appropriate.