Canada: Labour Market is Weaker than Headline Job Gains Suggest

The Canadian economy continues to churn out a decent number of new jobs despite clear signs that higher interest rates are weighing down growth. November’s data were more positive than many recent reports, with new jobs concentrated in full-time work and the private sector. But employment gains are slowing and continue to lag the pace of population growth (graph 1).

The stickiness of gains in permanent employees’ wages (graph 2) is in line with what we’ve been seeing in core inflation. These wages are tracked closely by the Bank of Canada to measure signs of possible wage-push inflation. Though the reacceleration experienced earlier this year looks to be done, continued advances near 5% in year-over-year terms still present upside risk for price pressures. That said, the weaker hours and employment are the forward-looking signals that the Bank will likely be putting more weight on. The weakness may in fact be a response to the high costs of labour which is now one of the dominant problems businesses are reporting in various surveys. This suggests wage pressures should eventually cool.

It feels as though we discuss the inflation and monetary policy implications of skyrocketing population growth every month, and we’ll do it again today. The recent record pace looks to be easing, but gains remain very strong (graph 3). As the Bank of Canada tries to tame price pressures, the surge in headcount gains has the potential to stimulate demand for goods and services and reinvigorate inflation. But hefty headcount gains also help to increase the supply of available workers and reduce labour shortages and potential wage-push inflation over time. Reinforcing the idea that the latter dynamic is gaining dominance, the number of job searchers has increased 19% since January, whereas the job vacancy rate has been on a steady downward trend.

With the labour market broadly continuing to loosen, we think that the Bank of Canada’s next move will be a cut in the second quarter of 2024. Moreover, economic weakness was clear in the third quarter GDP External link. This link will open in a new window. numbers released yesterday, and Canadian consumers and businesses still haven’t felt the full effects of prior borrowing cost increases. We continue to anticipate that Canada’s economy will experience a downturn in the quarters ahead.