Remarks by Tiff Macklem
Governor of the Bank of Canada
Public Policy Forum
November 10, 2022
Toronto, Ontario
Restoring labour market balance and
price stability
Introduction
Good morning. It's
great to be back in Toronto to discuss an issue that matters to
I'm particularly pleased to be on a
everyone-the Canadian labour market.
university campus for a speech that explores the future of workers and jobs. And
I want to thank the Public Policy Forum for inviting me to engage with students,
researchers and thought leaders on this important issue.
My Governing Council colleagues and I meet with stakeholders of all kinds-
business leaders and community groups, unions and students. And everywhere
we go, we get many of the same questions. First, people ask about inflation and
I'll get into that today.
interest rates. Controlling inflation is our top priority, and
Everyone also wants to talk about jobs and the labour market, and three
can't businesses find enough workers?
questions regularly come up: Why Are we
going into a recession, and does that mean a big rise in the unemployment rate?
what is the Bank of Canada's role in
And supporting maximum sustainable
employment?
So today I want to address these questions. I will tackle them in three parts. First,
I'll explain that
I want to outline how inflation and the labour market are linked.
returning to low and stable inflation is the best way to achieve maximum
sustainable employment. Our mandate is explicit about that. Second, I want to
highlight how the Canadian labour market was hit by COVID-19, how it recovered
and what we expect in the coming months. Finally, I want to discuss structural
that we'd be
changes in the labour market, such as the aging of the population,
hadn't
grappling with even if the pandemic happened. I will discuss what we are
watching and what Canadian governments and businesses can do to help grow
the supply of labour.
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Our mandate
Since the Bank was founded, its mandate has been to promote the economic
and financial welfare of Canada. As we said when we renewed our monetary
policy framework last December, the Government of Canada and the Bank
believe that the best contribution monetary policy can make to the well-being of
Canadians is to deliver price stability. This is formalized with an inflation target,
which is the 2% midpoint of a 1% to 3% inflation-control range.
The Government and the Bank also agree that monetary policy should continue
to support maximum sustainable employment. We recognize that maximum
sustainable employment is not directly measurable and is determined largely by
non-monetary factors that can change through time. This reflects the reality that
maximum sustainable employment is more of a concept than a number. In
we've
practice, knowing when reached it is difficult because we have to infer
where it is, and labour market indicators give us clear signals only when we are
well above or below it.
Finally, well-anchored inflation expectations are critical to both price stability and
That's why the
maximum sustainable employment. Government and the Bank
agree that the primary objective of monetary policy is to maintain low, stable
inflation over time.1 What I want to stress here is that maximum sustainable
employment and inflation close to the 2% target go hand in hand. If employment
is well below its maximum sustainable level, the economy is missing jobs and
below the economy's productive capacity. This
incomes, and spending will be
downward pressure on inflation, pushing it below the target. That's what
puts
happened early in the pandemic. If the economy is operating above maximum
sustainable employment, businesses won't be able to find enough workers to
keep up with demand, putting upward pressure on prices and pushing inflation
above the target. That's where we are today.
At almost 7%, inflation is well above our 2% target. Inflation in Canada partly
reflects global factors-sharply higher prices for many commodities and
internationally traded goods. But much of the inflation we are experiencing
reflects domestic factors-namely, excess demand in the Canadian economy.
Our economy is overheated. Job vacancies are elevated, and businesses are
reporting widespread labour shortages. Over the last six months, wage growth
has increased and broadened across the economy. The unemployment rate in
June hit a record low-and while that seems like a good thing, it is not
sustainable. The tightness in the labour market is a symptom of the general
imbalance between demand and supply that is fuelling inflation and hurting all
Canadians.
Since March, we have been raising our policy interest rate to help bring inflation
back to our target. Higher interest rates will work to slow spending and labour
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demand in the economy, and over time, this will relieve domestic inflationary
pressures.
We're trying to balance the
risks of over- and under-tightening monetary policy. If
we don't raise interest rates enough, Canadians will
continue to endure high
inflation, and high inflation will become entrenched, requiring much higher
interest rates and a sharper slowing in the economy to restore price stability. If
we raise interest rates too much, the economy will slow more than it needs to,
unemployment will rise considerably, and inflation will undershoot our target.
Getting the balance just right is no easy task, and I want to explain what we'll be
watching in the labour market as we make monetary policy decisions in the
months ahead.
That starts with a look at the upheaval of the pandemic and what Canadian
workers have been through over the last two and a half years.
Deep recession, rapid recovery and excess demand
The recent history of the labour market can be broken into three distinct phases:
pandemic-related economic shutdowns, the recovery that came with re-opening,
and the current environment of excess demand. Let me address each of these in
turn.
The pandemic shock
The COVID-19 pandemic caused the biggest global downturn since the Great
Depression. Much of the economy shut down to contain the spread of the virus,
and millions of people lost their jobs. In Canada, we plunged into the deepest
recession on record, and the effects were devastating. Roughly 3 million people
who were employed before the pandemic were out of work by April 2020. And
another 2.5 million were working less than half of their usual hours. The shock hit
workplaces from coast to coast to coast.
But it hit very unequally. Work that required close contact with people-mainly in
the services sector-was shut down. That disproportionately affected youth,
women and low-wage workers. The closure of schools and daycares also hit
women with young children harder, and they experienced a greater decline in
their hours worked.
Never before has so much of the economy been shut down so suddenly and for
so long. We were very concerned that it would result in scarring. In other words,
we worried that damage to the incomes and careers of a whole segment of the
population, particularly women, youth and immigrants, would be permanent.
The recovery
That brings me to the second phase: the fastest recovery ever. Do you
couldn't travel abroad or even
remember that first year of the pandemic? We
much within Canada, so we stayed home. We renovated our homes to
accommodate working and studying remotely, and we bought many goods to
replace the fun we'd normally
get from the services sector.
Just four months after the employment lows of April, nearly two-thirds of the job
losses were recouped What was behind the rapid bounce back? It was
(Chart 1).
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largely because the recession came from an unprecedented event-the
pandemic-and not from imbalances or structural problems in the economy. That
meant that when the economy reopened, employment could be restored quickly.
We expected a rapid rebound in employment with reopening, but we were
concerned that too many people would be left behind. Fortunately, the scarring
about wasn't as pervasive as we had feared
we were worried because
employment recovered quickly.
Chart 1: Employment has recovered quickly
Level of employment, monthly data, index: the month of peak employment immediately before each
recession = 100
Index
110
105
100
95
90
85
80
0 6 12 18 24 30 36 42 48 54 60
Months
COVID-19 recession 1981-82 recession 1990-92 recession 2008-09 recession
Note: Data for the COVID-19 recession are available for 32 months.
Sources: Statistics Canada and Bank of Canada calculations Last observation: October 2022
The synchronous policy response of governments and central banks around the
world played a big role in supporting the recovery. In Canada, fiscal policies were
designed to help keep workers attached to their employers and businesses afloat
even with little money coming in.2 That limited damage to the labour market.
Monetary policy actions complemented these fiscal policies. We cut policy
interest rates and introduced quantitative easing to reduce borrowing costs,
which supported spending and helped restore employment.
The reopening of schools and daycares helped too. As schools returned to
inclass teaching, mothers went back to work. This reduced the uneven impact of
the pandemic, but it did not eliminate it.3
As the vaccination rate increased and the economy reopened, those employed in
goods-producing industries returned to work sooner than those engaged in hard-
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to-distance services.4 And sectors where remote work is effective-such as
professional services, public administration and finance, and insurance and real
estate-experienced employment well above their pre-pandemic levels, while
employment in services sectors such as hotels and restaurants remained much
below.
Overall, this rapid pace of the recovery is unheard of, far faster than in past
recessions.
Excess demand
That brings me to 2022 and our current labour market. We are in excess
demand, where the economy's need for
labour is outpacing its ability to supply it.
At the end of last year, it was not obvious that the labour market would rapidly
overheat in 2022. The Omicron variant was spreading, and COVID-19 case
numbers were once again rising. But looking through the volatility in the labour
market caused by waves of the pandemic, we can now see a clear trend of an
increasingly tight labour market in 2022. Employment growth remained strong,
reports of labour shortages increased, and wage growth picked up.
To meet rising demand, employers reached more deeply into the labour market,
and they found some new workers. Hiring of immigrants-especially recent
immigrants-increased, easing employment gaps between these workers and
Canadian-born prime-age workers.5 Pandemic innovation and strong labour
markets also brought more flexibility to some jobs, partly due to digitalization
accelerated by the pandemic. Employers could more easily accommodate
workers in remote locations or those who needed flexible hours. Long-term
unemployment, which rose sharply during the pandemic, returned to its
prepandemic levels.
We began raising our policy interest rate in March to cool this overheated
economy, but the momentum in the labour market held. Employment gains
continued, and labour shortages intensified through the spring. The
unemployment rate reached a record low 4.9% in June. Job vacancies exceeded
one million in the second quarter-a new record. Rising vacancies with low
unemployment were clear signs that the economy was out of balance, with
demand running ahead of supply.
In recent months, we've seen initial signs that these
exceptionally tight labour
market conditions have started to ease. Since the spring, employment has
levelled off, and the unemployment rate has crept up a little, to 5.2%. Wage
growth has risen but now looks to be plateauing. Job vacancies have started to
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decline. Their softening has been evident in sectors that are more sensitive to
interest rates, such as manufacturing and construction (Chart 2).
Chart 2: Job postings have eased, and employment growth is weaker in
interest-ratesensitive sectors
a. Percentage change in job postings b. Employment change from July
%
relative to 2018 2022 to October 2022
100
Not sensitive
80
60
Moderately
40
sensitive
20
Sensitive
0
-20
Total
-40
-60
2019 2020 2021 2022
0 2 4 6
Sources: Indeed, Statistics Canada and Bank of Canada Last observations: Indeed, October 28, 2022; Labour Force
calculations Survey, October 2022
Looking ahead to balance
As we look ahead, there are two elements to achieving a better-balanced labour
market: demand and supply. Demand for labour needs to moderate so supply
can catch up. And the more the labour supply grows over time, the less slowing
is needed in labour demand to restore and maintain price stability.
Labour demand
The first part-slowing demand-is what we influence with interest rate
increases. Generally, low unemployment and high demand for workers benefit
Canada's economy. Good jobs are the best way to reduce inequality and ensure
that Canadians have the income they need to meet the needs of their families.
But right now, we need the economy to slow down. With more modest spending
growth, the demand for labour by businesses will ease, vacancies will decline,
and the labour market will come into better balance. This will relieve price
pressures.
Increasingly, we hear concerns that Europe, the United States and even Canada
are heading for a recession. In our Business Outlook Survey released a few
weeks ago, a majority of Canadian firms surveyed said a recession is likely in the
next 12 months. As we said in our October Monetary Policy Report, we expect
growth to stall in the next few quarters-in other words, growth will be close to
zero. That means two or three quarters of slightly negative growth are just as
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growth. That's not a severe
likely as two or three quarters of slightly positive
recession, but it is a significant slowing of the economy.
Slower economic growth will likely lead to higher unemployment. We know that
job losses have a human cost. But because the labour market is so hot and we
have an exceptionally high number of vacant jobs, there is scope to cool the
labour market without causing the kind of large surge in unemployment that we
have typically experienced in recessions.
be watching very closely for
As we use higher interest rates to cool inflation, we'll
signs that the economy and the labour market are responding. One way to
explore the needed adjustment in our labour market is through the lens of what
economists call the Beveridge curve. This curve depicts the typically inverse
relationship between job vacancies and unemployment (Chart 3).
Chart 3: Cooling labour demand is associated with some increase in unemployment
Quarterly, seasonally adjusted, dotted line denotes evolution over time
Vacancy rate
(% of labour force)
6
5
2022Q3
4
3
2
1
0
4 5 6 7 8 9 10 11 12 13 14
Unemployment rate (%)
Fitted curve (2011-19 sample) Observed values
Note: Job vacancies for 2022Q3 are based on the average of July and August from the Job Vacancy and Wage Survey. The curve is based
on data from 2011-19.
Sources: Indeed, Canadian Federation of Independent Business, Statistics Canada and Bank of Canada
Last observation: 2022Q3
calculations
As job vacancies decline, unemployment usually goes up. But by how much?
That depends on where the labour market is along the curve. Generally
speaking, when job vacancies are high, as they are now, a decline in vacancies
does not lead to as big an increase in unemployment as it does when job
Staff analysis of Canada's Beveridge curve
vacancies are low to begin with.
suggests that the unemployment rate will rise somewhat if the job vacancy rate
returns to more normal levels.6 But it would not be high unemployment by
historical standards.
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Well, it's clear that the
So what does that mean for Canadian workers?
adjustment is not painless. Lower vacancies mean it could take longer to find a
job, and some businesses will find that with less demand for their products, they
don't have enough work for
all their workers. But relieving the pressure in the
labour market will contribute to restoring price stability.
be watching a broad set of indicators
We'll to gauge the health of the labour
market and how it is adjusting to tighter monetary policy. As we watch to see how
the economy is responding to higher interest rates, we expect that some parts of
the economy will be more sensitive to higher borrowing costs and will slow earlier
or more sharply. The response will be somewhat uneven. Some industries more
We'll be looking beyond
than others will see fewer vacancies or even job losses.
headline employment numbers to gauge how different groups in the labour
market are adjusting. Last year, we launched our new dashboard of indicators to
help us assess the overall health of the labour market and where we are relative
to maximum sustainable employment.7 (See the Appendix).
Labour supply
That brings me to the second component of getting back to balance: labour
supply. The labour market is also being-and will continue to be-profoundly
affected by supply-side developments that are beyond the scope of monetary
"Where are
policy. That brings us back to one of the frequently asked questions:
all the workers?"
The short answer is most of them are working and some have retired. We now
have half a million more people employed than we did before COVID-19 hit. But
an increase in retirements and less immigration early in the pandemic have
That's another reason the labour market is so tight.
reduced labour force growth.
These demographic shifts have played a big role in the supply of labour. In
Canada, as in many advanced economies, the age group that grew the fastest in
not it's
recent years was those aged 65 and over. That's pandemic-related,
simply the aging of the baby boomers. Those over 65 tend to have the lowest
labour force participation rate, and that has been pulling down the growth of
Canada's labour force
in recent years.8
has typically helped Canada's labour force
Immigration grow. But the pandemic
disrupted immigration flows. Borders closed, and Canada fell short of its 2020
immigration target by about 156,000 people, or an estimated 100,000 workers.
Fortunately, immigration is bouncing back as border restrictions return to normal.
Canada met its immigration target of 401,000 in 2021. And, based on the
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increase in the immigration targets since then, the shortfall in permanent
residents caused by the pandemic should be recouped in 2023.9 Many advanced
economies whose populations are aging are looking to increased immigration to
meet the needs of their labour markets. But because of relatively higher
immigration targets, Canada will have an advantage in coming years-Canada's
population growth is expected to far exceed that of other G7 countries
(Chart 4).10
Chart 4: Canada has the highest projected population growth in the G7
Annual population growth, average 2022-32
%
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
Japan Italy Germany France United United States Canada
Kingdom
Sources: UN population projections via Haver Analytics and Bank of Canada calculations
Last data plotted: 2032
This is a key reason why the growth outlook in our October Monetary Policy
Report exceeds that of some of our peers, including the United States. The
strong immigration targets suggest that net immigration will account for over
expected growth in Canada's potential output.
twothirds of the
The strength of the labour market has helped improve outcomes for recent
immigrants. We can also increase participation by other workers, including
women, if we leverage the changes that these tight labour markets have brought.
We can further reduce the long-standing gap between prime working-age women
and men. The pandemic showed us how important child care is-when it
Canada's female participation rate is
disappeared, so did many female workers.
higher than that of the United States. But other countries have higher female
9
Net immigration flows surged by about 270,000 in the second quarter of 2022, by far the highest
single quarter increase on record. The government has targeted an increase of 1.4 million
permanent residents from 2022 to 2024.
10
Canada's
These forecasts for population growth rates exclude the recent increase in
immigration targets, which should further boost growth. See Immigration, Refugees and
Citizenship Canada, (November 1, 2022).
"An Immigration Plan to Grow the Economy"
participation than we do-we're only just above the median of member countries
of the Organisation for Economic Co-operation and Development for participation
of women aged 25 to 54, ranking 16th out of 38 in 2021. Improvements to
universal child care may narrow these differences, though the full effects will take
time.
Other populations may also benefit from improved labour market access,
including Indigenous people, who have a younger and faster-growing population
than many other groups. Potential for remote work, as well as training to develop
skills in areas with critical labour shortages, may open new opportunities for
groups facing local labour market challenges. And companies need to do their
part to attract and retain new segments of the labour force.
By adjusting to and taking advantage of structural changes in the labour market,
Canada can increase the sustainable growth rate of our economy. An aging
population reduces the participation rate, and higher immigration is becoming
increasingly important for Canada's
potential growth. Changes brought by
globalization and technological change, especially digitalization, will also
continue to affect labour demand and the skills employers need. The net effect
on maximum sustainable employment is something we will be working to assess.
An increased supply of workers raises the rate the economy can grow without
generating inflationary pressures. But enhancing supply takes time. It also
creates new demand. New workers will have new incomes, and that will add to
That's
spending in the economy. why increasing supply, while valuable, is not a
substitute for using monetary policy to moderate demand and bring demand and
supply into balance.
Conclusion
It's time for me to conclude.
Since the onset of COVID-19, the labour market has been in tremendous turmoil.
The pandemic caused a surge in unemployment and had a terribly uneven
impact, exacerbating the inequality already faced by women, youth and
marginalized workers. We were very concerned about widespread job losses,
deep cuts in consumer spending and, ultimately, deflation. But the recovery was
swift and across the board, with the fastest rebound in employment ever. Now
the economy has gone too far in the other direction. The economy is in excess
demand, the job market is too tight, and inflation is too high. Monetary policy has
begun to have an impact, but it will take time for the effects of higher interest
rates to spread through the economy and reduce demand and inflation.
Once we get through the slowdown, growth will pick up and our economy can
grow solidly again with healthy employment and low inflation. How much
employment growth we can achieve while maintaining low inflation will depend
on the growth of labour supply. This is the fundamental concept that maximum
how
sustainable employment captures. It is not maximum employment-it's
much employment the economy can sustain while maintaining price stability. As I
can't have one without the other.
said earlier, you
Growing maximum sustainable employment is a shared responsibility of
government, businesses and workers. Increased immigration adds potential
workers, and governments need to ensure newcomers have a smooth path into
the workforce, with credential recognition and settlement support like language
and skills training. Businesses need to invest in training so we can reduce the
skills mismatch. And workers need to invest in gaining the skills the new
economy needs.
Our priority at the Bank of Canada is to restore price stability. The overriding
imperative is to ensure that high inflation does not become entrenched because,
if that happens, nothing works well. This was the experience of the 1970s.11 The
failure to control inflation resulted in high inflation and high unemployment.
Labour strife increased as workers tried to cope with large increases in the cost
of living. And ultimately it took much higher interest rates, and a severe recession
with a large increase in unemployment, to rein in inflation and re-anchor inflation
expectations. That is exactly what everyone wants to avoid.
That's why we have our interest rate increases. And that's why we
front-loaded
are resolute in our commitment to return inflation to the 2% target. To get there,
we need to rebalance the labour market. This will be a difficult adjustment. We
want to do this in the best way possible for Canadian workers and businesses.
Higher interest rates will help cool spending and the demand for labour in the
economy. This will give supply time to catch up, relieving price pressures. We will
be monitoring a wide range of indicators to assess this rebalancing and Canada's
sustainable growth rate. Canada has some advantages that will help support our
labour supply, creating more capacity for growth.
The best contribution monetary policy can make to a healthy labour market is to
deliver price stability. With inflation and inflation expectations well anchored on
the 2% target, our economy, our workers and our businesses will be positioned
for growth and prosperity.
Thank you.
Appendix
The first chart shows the depth of the weakness in the labour market at the
beginning of the pandemic. The red circle is where these indicators were before
the pandemic. As you can see, in April 2020, almost every indicator was way
below pre-pandemic levels. In the second chart, we see that many indicators are
now well above pre-pandemic levels, which provides a clear indication that the
labour market is overheated.
Chart A-1: Summary of labour market measures through time
Note: This chart illustrates how much labour market health has recovered across select labour market indicators. A full bar implies that the measure has fully recovered, while a bar on the
centre ring implies the measure is at its crisis trough. LFS is Labour Force Survey; BOS is Business Outlook Survey; JVWS is Job Vacancy and Wage Survey. For a full list of indicators see E.
Ens, C. Luu, K. G. See and S. L. Wee, "Benchmarks for assessing labour market health," Bank of Canada Staff Analytical Note No. 2022-2 (April 2022).
Sources: Statistics Canada, Bank of Canada and Bank of Canada Last observations: LFS, October 2022; BOS, 2022Q3; JVWS, 2022Q2;
calculations National accounts, 2022Q2