Canada’s Jobless Rate Drop Signals Further Interest Rate Hikes
Canada’s jobless rate has fallen to a modern low of 5.2 percent, a figure virtually guaranteeing another increase in interest rates when the Bank of Canada concludes its deliberations on June 1st. This downward trend in unemployment reflects a tight labor market and increasingly challenging conditions for businesses seeking to navigate the evolving economic landscape. The Bank of Canada is closely monitoring this situation as it considers the implications for inflation and the broader economy.
Tight Labor Market Signals Further Rate Hikes
The latest monthly survey of the Canadian labor market, conducted by Statistics Canada, revealed a largely unchanged employment picture in April. While employment remained stable, hours worked decreased by 1.9 percent from March, a concerning trend that contrasts with the demand for goods and services. Despite this decline in hours worked, the level remained 1.3 percent higher than the pre-pandemic levels recorded in February 2020, indicating a persistent imbalance between supply and demand in the workforce. This persistent tightness in the labor market is a key factor driving the Bank of Canada’s current policy stance.
Unusual Job Market Dynamics
Several indicators point to a maturing labor market, with most of the post-pandemic adjustment already occurring. The employment rate, measuring the percentage of the population employed, remained at 61.9 percent, the same level as early 2020. However, a significant concern is the elevated number of job vacancies, suggesting a dwindling pool of available labor. As Charles St-Arnaud, chief economist at Alberta Central, noted, “These are the signs of a mature labor market where most of the post-pandemic adjustment has already happened.”
Long-Term Unemployment Remains a Concern
April’s Statistics Canada household survey showed a modest addition of 15,300 positions, a statistically insignificant change due to its size compared to the survey’s margin of error. Despite this small change, the unemployment rate for individuals aged 25 to 54 dropped to 4.3 percent, the lowest recorded figure since 1976. More worryingly, 224,000 people had been unemployed for more than 27 weeks – a figure representing nearly 20 percent of total unemployment, significantly higher than the 15.6 percent recorded in February 2020, underscoring the challenges faced by individuals who have been out of work for an extended period.
Wage Pressures and Inflationary Risks
Average hourly wages increased by 3.3 percent from April 2021, a substantial rise by historical standards. However, this growth is falling short of inflation, which surged almost seven percent over the same period. This discrepancy poses a significant risk to the Bank of Canada’s efforts to curb inflation, as rising wages could further fuel inflationary pressures. The surge in average hourly wages in the hotel and restaurant industry, up six percent from April 2021 compared to 1.4 percent in March, suggests a shifting dynamic in pay expectations. As Veronica Clark, an economist at Citigroup Capital Markets Inc., observed, “Total wages have grown at a moderate pace, but not nearly as fast as a tight labor market would suggest.” There are early indications that wages are starting to pick up, particularly in sectors experiencing significant labor shortages.
Bank of Canada’s Continued Focus on Inflation
The Bank of Canada’s previous conclusion that demand had overshot supply, contributing to three-decade high inflation, spurred a half-point interest rate increase in April. Governor Tiff Macklem has repeatedly signaled a continued commitment to raising borrowing costs, potentially exceeding three percent by the end of the summer if deemed necessary to alleviate inflationary pressures. The economy is currently characterized as “overheating,” according to Royce Mendes, head of macro strategy at Desjardins Group, a situation demanding the Bank of Canada’s intervention. Coupled with global economic trends, these factors further reinforce the likelihood of continued interest rate increases.
