Canada’s Strong Job Growth Could Be Overstated
Canada’s robust hiring numbers over the past several months have fueled expectations of an interest rate hike by the Bank of Canada this week. However, a closer examination of the labour market reveals potential weaknesses that could temper the central bank’s enthusiasm. While Canada’s job gains have been impressive, particularly when compared to the United States, the underlying dynamics of the recovery are raising concerns about productivity growth and wage inflation. The Canadian economy is back to levels seen at the start of 2020 in terms of employment, according to the most widely used employment survey. This recovery, however, is intertwined with factors that could complicate the Bank of Canada’s policy decisions.
The immediate impression from Canadian employment figures is one of a substantial rebound. Over 2021, Canada added 886,000 positions – a record – outpacing the U.S., which still lags behind its pre-pandemic employment levels by approximately 2.3 percent. This stark comparison has led analysts to anticipate a rate hike by the Bank of Canada. However, underlying this headline number are critical questions surrounding productivity and wage pressures. Canada’s recovery has brought employment levels back to the baseline established before the COVID-19 pandemic, as measured by a popular employment survey.
Despite Canada’s apparent success in recovering from the COVID-19 recession, several other economic indicators paint a different picture. The U.S. has seen its gross domestic product (GDP) rise significantly, reaching US$19.4 trillion in the second quarter, surpassing its levels at the end of 2019. Conversely, Canada’s GDP remains 1.4 percent below its pre-pandemic level of $2.12 trillion, according to Statistics Canada’s data from the third quarter. This difference underscores a key divergence in economic performance between the two countries.
A notable factor contributing to the disparity is the strength of business investment in the U.S. American companies appear to be focused on improving efficiency and investing in upgrades, a dynamic that isn’t as pronounced in Canada. Canadian firms, in contrast, have largely opted to staff up to meet demand, a strategy that, while beneficial in the short term, could prove problematic if productivity gains aren’t realized. Senior economist Brendon Bernard of Indeed highlighted this difference, stating that Canada’s recovery “is tough to achieve the sort of sustained pickup in wages,” a primary goal for the Bank of Canada.
The challenge for the Bank of Canada is amplified by muted wage growth. Wages in Canada have grown only 2.6 percent over the same period as overall employment gains, a relatively slow pace. This restrained wage growth—as opposed to the growth seen in the US—could alleviate pressure on the central bank to raise interest rates, but the core issue remains: the lack of productivity growth. Achieving sustained wage increases, particularly those that can keep pace with inflation, hinges on bolstering productivity.
Data reveals a significant disparity in productivity levels. Canada’s productivity declined by 1.5 percent in the third quarter, a substantial drop, while being stagnant in the previous quarter, despite the reopening of businesses and increased hours worked – according to Statistics Canada’s data published on December 3. In contrast, the U.S. experienced a slump in productivity of 5.2 percent and was stagnant, but prior to the fourth quarter of 2020, it had been climbing. This productivity gap is contributing to the debate around the Bank of Canada’s policy responses.
The Canadian labour market’s recovery isn’t evenly distributed. The concentration of job growth is skewed towards higher-paying sectors, such as education and technology, compared to lower-wage sectors. This disparity is evident when comparing employment levels across education levels and income brackets. University-educated workers and those in higher-paying industries have surpassed pre-pandemic levels by 3.3 percent, while lower wage sectors remain significantly behind – roughly 1.7 percent and 0.8 percent respectively. This unevenness reflects the impact of lockdowns on higher-touch industries like restaurants and retail. As a result, workers sought out better-paid jobs, which impacted certain sectors.
