Canada: Job Growth Was in Like a Lion but Out Like a Lamb in 2023

After consistently beating expectations for much of 2023, the Canadian labour market ended the year not with a bang but with a whimper. Year-over-year advances in hours worked accelerated modestly despite a drag from the public sector strike in Quebec. However, job growth slowed considerably, with net new full-time positions falling by almost 25k in December.

The broader and more important trend, however, is the extent to which hiring is significantly lagging the rate implied by population growth (graph 1). So, while headline jobs numbers were often impressive in 2023, the labour market is nonetheless softening. A continuation of this trend into 2024 should put some downward pressure on inflation, and is consistent with our latest forecast This link will open in a new window. of weakening but still positive employment gains.

Skyrocketing population growth also continues to have mixed inflation and monetary policy implications. So long as headcount gains continue to skyrocket, they risk stimulating consumer demand and potentially re-invigorating inflation, which has been trending lower. But to the extent that arrivals of skilled newcomers help fill job shortages—which are easing but still present in the Canadian economy—torrid population growth can also help to increase the supply of available workers and reduce potential wage-push inflation over time.

December’s pickup in year-over-year in wage gains (graph 2) is less positive for inflation control efforts. The Bank of Canada (BoC) tracks permanent employees’ wages closely to measure signs of possible wage-push inflation. Gains in this indicator had been hovering near 5% in year-over-year terms for the last several months but accelerated to a rate nearer to 6% in December. While the series has tended to be volatile historically, its increase nevertheless underscores the risk of wage stickiness, which the BoC will need to stay alert to.

This being said, our baseline view is that softening job growth alongside lower job vacancies, should cool wage pressures going forward. As a result, today’s data doesn’t change our view that the Bank of Canada’s next move will be a cut in the second quarter of 2024, or that that Canada’s economy will experience a downturn in the quarters ahead. Inflation is trending lower, and Canadian consumers and businesses still haven’t felt the full effects of prior increases in borrowing costs.