Canada: Employment Holds Up, but the Labour Market Is Still Weakening

Hiring continued in February. Not only did headline jobs advance again, but those gains were concentrated in full-time work while hours worked held steady. That said, as we’ve seen for most of the past year, private sector hiring continues to lag advances in the public sector. But most of the job gains came from self-employment, sending mixed messages about the health of the labour market, particularly against the backdrop of sharply higher business bankruptcies in January.

But the pace of employment growth remains a misleading indicator, as population gains once again outstripped net job creation (graph 1). The rate of Canada’s headcount increase set another record year-over-year increase and maintained a hefty monthly pace above 3% annualized. Against that backdrop, to maintain the employment rate, we would’ve needed to see roughly 65k jobs created last month. Consequently, the labour market is still softening despite a solid pickup in hiring.

By province, the trend of lagging employment growth is most apparent in Ontario (graph 2). But it’s also present in the other three largest provinces, albeit not to as great an extent. That said, in aggregate, other provinces aren’t experiencing this same trend.

As we’ve highlighted many times previously, skyrocketing population is a mixed economic bag. To the extent that it stimulates consumer demand and overall economic activity, there is a risk that it reinvigorates inflation in the short run. But labour shortages continue to present both shorter- and longer-run headwinds to Canadian growth. Given how much newcomer integration into the labour market has improved in recent years, there’s a case to be made that international migration can help fill job shortages, boost the labour supply and mitigate potential wage-push inflation over time.  

Easing wage gains (graph 3) in February are more positive for efforts to return inflation to its 2% target. The Bank of Canada (BoC) tracks permanent employees’ wages to measure signs of possible wage-push inflation. The year-over-year growth rate for this indicator fell for a second consecutive month and was below 5% for the first time since June of last year. That said, wage stickiness continues to present upside risk to inflation, and the BoC will need to continue to monitor this closely. Indeed, the Bank of Canada emphasized External link. the need to see further evidence that wage growth is moderating in its interest rate announcement on Wednesday. 

We remain of the view that the Bank of Canada will begin reducing its policy rate in the second quarter of this year. We still suspect that the central bank will put more weight on easing price pressures and falling job vacancies than on headline job gains and real GDP that are being propped up by surging population growth. And we’re still of the view that as Canadian consumers and businesses increasingly feel the full effects of prior increases in borrowing costs, it will prompt a less restrictive monetary policy stance starting in the middle of the year.