WN BANK OF CANADA
wat, BANQUE DU CANADA

Remarks by Tiff Macklem
Governor of the Bank of Canada
Winnipeg Chamber of Commerce
June 24, 2024

Winnipeg, Manitoba

Workers, jobs, growth and inflation-
Today and tomorrow

Introduction

Good afternoon. It's a pleasure to be here. Today is, of course, Saint-Jean-
Baptiste Day, celebrated by many franco-Manitobans. Bonne Saint-Jean a toutes
et a tous!

When I started as governor on June 3, 2020, the economy was in crisis. It was
early in the pandemic and Canada's unemployment rate was 14%-the highest
on record. Inflation was well below the 2% target-actually, it was slightly
negative. The immediate priority was to avoid deflation and get the economy
back on its feet.

But since 2022, we've been fighting a new battle-high inflation. When the
economy reopened, the combination of gummed up global supply chains, a
strong surge in demand and Russia's unprovoked invasion of Ukraine sent
inflation sharply higher. It peaked at just over 8% in June 2022. For more than
two years, our focus has been getting inflation back down.

We've come a long way. Monetary policy has worked, and it is continuing to
work. Since January, inflation has been below 3%, and our measures of
underlying inflation have eased steadily. This has increased our confidence that
inflation will continue to move closer to the 2% target this year. And earlier this
month, we lowered our policy interest rate for the first time in four years.

Low, stable and predictable inflation allows Canadians to spend and invest with
confidence. It lowers uncertainty and encourages long-term investment. And it
contributes to sustained job creation and greater productivity. This in turn leads
to improvements in our standard of living. That's why price stability is our number
one priority.

A key ingredient for price stability is a healthy labour market-one in which
Canadians have the jobs they want, employers have the workers they need, and
real wages grow in line with productivity. Economists call this maximum

I would like to thank Daniel de Munnik, Marc-André Gosselin and Shu Lin Wee
for their help in preparing this speech.

Not for publication before June 24, 2024
1:30 pm Eastern Time

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sustainable employment-the highest level of employment the economy can
sustain without triggering inflationary pressures.

The health of the Canadian labour market is what I'll talk about today. In the 2021
renewal of our monetary policy framework, the federal government and the Bank
of Canada agreed price stability is our primary objective. We also agreed
monetary policy should continue to support maximum sustainable employment.
Since then, we've done extensive work to bolster our analysis of the labour
market. We've published a new dashboard of labour market indicators and
updated our benchmarks for these indicators each year."

So where are we now? And what's ahead?

With higher interest rates, spending has cooled, and businesses have scaled
back their hiring plans. Strong immigration has also helped the supply of workers
catch up with demand, bringing the labour market into better balance. But it's
now getting harder to find a new job. That's particularly affecting younger workers
and newcomers to Canada. And it suggests that the economy now has room to
grow without building new inflationary pressures.

If we look at the labour market with a longer-term lens, we see that Canada's
growing, inclusive and well-educated labour force has been a key advantage for
our economy. It's been our primary source of economic growth for the past

25 years, and sustaining this advantage is critical to achieving strong non-
inflationary growth going forward.

That's my speech in a nutshell. If that's all you need, you can start checking your
phone now. But if you'll stick with me for another 15 minutes, I'll take a closer
look at the health of the Canadian labour market in both the short and the long
term.

The labour market cycle

When the pandemic hit and the economy shuttered, three million Canadians
were laid off and another two million saw their hours of work cut back.
Fortunately, the combination of new vaccines and exceptional fiscal and
monetary policy fuelled a rapid labour market recovery-indeed, it was the
fastest recovery on record.

But as the economy fully reopened, the labour market moved quickly from
recovering to overheated. Demand rebounded rapidly as people tried to catch up
on what they had missed through the lockdowns. Businesses scrambled to find
workers, and the unemployment rate fell to 4.8% by July 2022-a level not seen
since the 1970s. Job vacancies rose sharply, reaching one million vacant
positions. Wage growth started to climb as the worker shortage intensified and
inflation peaked above 8%. The economy was clearly overheated.

Beginning in March 2022, the Bank of Canada raised interest rates forcefully to
cool demand and relieve price pressures. As higher interest rates worked their

1 For the most recent update, see E. Ens, A. Lam, K. See and G. Galassi, "Benchmarks for
assessing labour market health: 2024 update" Bank of Canada Staff Analytical Note No. 2024-8
(April 2024).

-3-

way through the economy and restrained spending, reports of job shortages
began to decline. Job vacancies came down, returning close to their historical
average, and inflation eased (Chart 1).2

Chart 1: Job vacancies and inflation peaked and declined roughly in tandem

9 6.0

fos)

45

Beginning of pandemic

40

3.5

3.0

2018 2019 2020 2021 2022 2023 2024

-- CPI inflation (year-over-year percentage change, not seasonally adjusted, left scale)

- Job vacancy rate (right scale)

As vacancies came down, the unemployment rate rose gradually, reaching 6.2%
last month. This is just above where it was before the pandemic, when the labour
market was operating close to maximum sustainable employment. Here in
Manitoba, the unemployment rate in May was 4.9%, still below where it was just
before the pandemic started.

Overall, the adjustment has gone well

In November 2022, when we were raising our policy interest rate, I gave a
speech about how we expected the labour market to adjust to higher rates and
slower growth. I said that while the adjustment wouldn't be without some pain, it
need not involve a sharp rise in the unemployment rate. With vacancies so high,

2 The job vacancy rate is defined as the number of vacant positions on the last business day of
month, expressed as a percentage of labour demand (occupied and unfilled positions).

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much of the adjustment could come from businesses taking down job postings
rather that laying off workers.

This was based on what economists call the Beveridge curve, which shows the
typically inverse relationship between job vacancies and unemployment.? The
evolution of the Beveridge curve is a little complicated. But it provides some
insight into why the overall labour market has adjusted relatively smoothly to
slower growth (Chart 2). So let me walk you through it.

Chart 2: Job vacancies have declined substantially, and unemployment has
edged up

8

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@ August 2022 to present A March 2020 to July 2022 @ Pre-March 2020
- Pre-pandemic Beveridge curve -- Beveridge curve during 2020-21

Before the pandemic, the economy was near full employment. Vacancies as a
percentage of the labour force and the unemployment rate were both fairly low
(Chart 2, cluster of blue diamonds on the black curve).

3 The Beveridge curve describes the downward relationship between vacancies and
unemployment. In Chart 2, we scale both measures by the labour force, i.e., we plot vacancies as
a percentage of the labour force against the unemployment rate. Data on vacancies are mainly
derived from Statistics Canada's JVWS with the latest two months of data supplemented by data
from Indeed.

-5-

The pandemic severely disrupted the labour market. The unemployment rate
rose rapidly to just above 14% in May 2020 (Chart 2, the purple dot). With this
disruption in the labour market, the entire Beveridge curve shifted up and to the
right (Chart 2, the orange curve). As the economy gradually reopened, job
vacancies rose slightly, and the unemployment rate came down quickly. This is
reflected by the movement from right to left along the orange Beveridge curve
(Chart 2, orange triangles).

As the economy reopened fully, the Beveridge curve shifted back down. With
less disruption, we began to see better matching between job seekers and job
vacancies. And we moved from the orange curve back down to the black one.
The unemployment rate fell to a 50-year low of 4.8% (Chart 2, black dot), and
the economy was back on its old Beveridge curve (Chart 2, black curve).

As we raised interest rates and the economy cooled, businesses started to scale
back job postings. And higher immigration helped fill job vacancies. The
combined effect saw vacancies decline considerably, moving down the steep
part of the Beveridge curve (Chart 2, green dots). We're now approaching the
same part of the curve that we were at before the pandemic-the red dot (Chart
2), which is our latest observation.

What does this recent dynamic mean? When unemployment is very low and job
vacancies are very high-as they were when the economy was overheated-the
curve is steep. So when you see the green dots moving down without moving
much to the right, that means vacancies can come down substantially with only a
relatively small increase in unemployment.

This is the soft-landing scenario. It has always been a narrow path, and we have
yet to fully stick the landing. Looking forward, the unemployment rate could rise
further, particularly as the Beveridge curve is getting flatter. But we continue to
think that we don't need a large rise in the unemployment rate to get inflation
back to the 2% target. Inflation is not yet 2%, but it is a lot closer. And with further
and sustained easing in underlying inflation in recent months, we are more
confident that inflation will continue to move closer to the target.

Turning to wage dynamics, when the labour market was tight and inflation was
high, wage growth increased. Depending on the measure you look at, wage
growth peaked at between 472% and 6%. This was roughly twice the pre-
pandemic average of 2% to 3%. With inflation now much lower and the labour
market rebalancing, we are starting to see evidence that wage growth is
moderating. The latest numbers on a six-month basis suggest wage growth has
eased to about 4%. This is clearly down from the peak, but still above the pre-
pandemic average (Table 1).

The fact that wages are moderating more slowly than inflation is not surprising:
wages tend to lag adjustments in employment. Going forward, we will be looking
for wage growth to moderate further.

In assessing the implications of wage growth for labour costs and inflation, it is
important to separate out wage gains that reflect productivity improvements.
Wage gains that are backed by productivity gains do not increase unit labour
costs or inflationary pressures. In recent years, the number of higher-paying jobs
has grown more than low-wage jobs, which means that overall wage growth has

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been higher. To the extent that this reflects workers gaining valuable new skills or
finding jobs that better match their skills, it should not add to unit labour costs
and inflation. So when assessing the inflationary implications of wage growth, we
place more weight on wage measures that try to control for occupational shifts
(the fixed-weight measure from the Labour Force Survey) or labour cost
measures (like unit labour costs). These are running a little lower than other
wage measures, particularly when using the more timely six-month rate of
change.

Table 1: Wage growth shows some signs of moderating

Average
Most recent Momentum growth
growth (year (Six months, (1998-2019,
over year) annualized) year over
year)

Variable-weight measures 5.1% AA% 2.8%
(Labour Force Survey)
Fixed-weight measures 4.5% 3.3% 2.6%
(Labour Force Survey)

2.

Compensation per hour

worked (Productivity 3.5% 3.0%

accounts)

3.9%

8
6
Average hourly earnings
(Survey of Employment, 3.8% 4.1% 5%
Payrolls and Hours)
0
9

But the cooling in the labour market has affected some more than others

So that's the broad adjustment in the labour market-a reasonably smooth
cooling. But the aggregate masks some important differences. Some workers are
feeling the slowdown more than others. Employers may not be laying off workers
in large numbers, but less hiring over the last year means it's harder to find that
first job. That hurts new graduates and younger workers as well as newcomers to
Canada.

Let me take a moment to dig into some detail.

The unemployment rate for newcomers is rising much faster than the overall
unemployment rate (Chart 3). Newcomers are taking longer to find a job. This is
hard on them-integrating into the Canadian economy is becoming more difficult.
It also suggests the government has some room to slow the growth of non-
permanent residents without tightening the labour market too much and causing
significant labour shortages.

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Chart 3: Unemployment has risen faster among newcomers
Unemployment rate, 3-month moving average

18%
2019 Average May 2024
Newcomers: 9.1 Newcomers: 11.7
Others: 5.5 Others: 5.7

16%

14%
12%
10%
8%
6%
4%
2018 2019 2020 2021 2022 2023 2024
- Newcomers -- Others

esidents wh

Youth employment, too, has been softening (Chart 4). Again, the evidence
suggests that people established in their jobs are not experiencing much of an
increase in unemployment. But with fewer job vacancies, it's taking longer for
young people entering the labour market to find a job, and their unemployment

rate has risen. It's now about 2 percentage points above its pre-pandemic
average.

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Chart 4: The rise in unemployment is greater for young workers

Unemployment rates by age group, 3-month moving average
30%

2019 average May 2024
15-24: 10.8 15-24: 12.7
25-54: 4.7 25-54: 5.2

5%

0%
2019 2020 2021 2022 2023 2024

- 15-24 years - 25-54 years

Labour market adjustments are never evenly distributed. And monetary policy
can't target specific parts of the labour market. But as we set monetary policy,
the Bank needs to looks beyond the aggregate to understand what the cooling in
the labour market means for different people. The overall unemployment rate is
close to pre-pandemic levels and still relatively low. But the slowdown in hiring
has led to increases in unemployment for younger workers and newcomers to
Canada. These workers are feeling the effects of slower growth more than
others, and we need to recognize this.

This matters for monetary policy because it indicates there is some slack in the
labour market. That suggests the economy has room to grow and add more jobs
without creating new inflationary pressures. It also matters for household
financial stress. People who find it hard to get a job often find it hard to keep up
with their credit card and other debt payments. Many indicators of financial stress
declined during the pandemic, but they are now back up near pre-pandemic
levels. And late payments on credit cards and auto loans are above pre-

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pandemic levels. We see this stress particularly among renters.* These are often
younger workers and newcomers.

The labour market and long-run growth
Let me now shift gears and turn to the longer run.

For years, Canada's biggest economic advantage has been its labour force,
which includes people with jobs and people looking for work. Growth in
employment in Canada has been much stronger than in the United Kingdom, the
euro area and even the United States.5 And this was true before the pandemic
and through the pandemic recovery (Chart 5).

Chart 5: Canadian employment growth has outpaced that of other advanced
economies

Seasonally adjusted hours worked, index: 2000Q1 = 100, quarterly data
135
130
125
120

115

110

Index

105

100

95

90

85

2000 2005 2010 2015 2020

- Canada -- United States - United Kingdom - Euro Area

4 Bank of Canada, Financial Stability Report (May 2024).

5 Employment here refers to the total number of hours employed in an economy, as shown in
Chart 5.

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Our labour force advantage reflects three key strengths: high labour market
participation, strong immigration and a good education system. Let me take each
of those in turn.

First, Canada's labour force participation is stronger than in these other
economies. Our participation rate for women is at the top of the G7, helped by
affordable child care and flexible work arrangements.

Second, Canada attracts some of the world's best and brightest students and
workers, and we integrate them relatively quickly into the Canadian economy.

And finally, our education system does a good job overall of developing the
workers that the economy needs and businesses want to hire. Our post-
secondary attainment level is the highest among advanced economies, although
we trail the United States in the attainment of advanced degrees.

Our Achilles heel is productivity. We have been very good at growing our
economy by adding workers. We have been much less successful at increasing
output per worker. And this is catching up with us. While we managed to make
up for our productivity under performance from 2000-19 with strong labour force
growth, since the pandemic, Canada's GDP growth has been weaker than in the
United States (Chart 6).

Chart 6: Real GDP growth in Canada is no longer keeping pace with the US
Seasonally adjusted, index: 2000Q1 = 100, quarterly data

170

160

150

140

130

Index

120

110

100

90

2000 2005 2010 2015 2020

- Canada -- United States - United Kingdom - Euro Area


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As my colleague Senior Deputy Governor Carolyn Rogers highlighted in March,
weak productivity growth in Canada is a long-standing issue and it's reaching
emergency levels. As good as we have been at growing our economy by adding
workers, we need more than one engine.

Moving forward we need to play to our strengths-growing our labour force-
while we tackle our weaknesses-investment and productivity.

We should not take our labour market advantages for granted-we need to
maintain and build on them. That means continuing to improve the accessibility
of child care. It means concerted efforts to improve the labour force participation
of groups that have traditionally been left out. I'm thinking especially of Canada's
Indigenous peoples-a growing pool of young talent who have been excluded
from economic opportunities for too long. It means aligning immigration to long-
standing labour shortages in key areas like skilled trades. It means properly
recognizing the credentials, qualifications and experience of immigrants. And it
means sustaining and enhancing our education system, and ensuring it is
developing students for the jobs of the future.

Tackling our productivity weakness will be harder but it is vital. Productivity
growth ensures our businesses are competitive in international markets. It pays
for higher wages and underpins rising living standards. And with an aging
population and limits to how many immigrants we can successfully absorb each
year, improving our productivity growth will become more important to sustaining
trend growth.

On the surface, the cause of low productivity growth in Canada is clear enough.
On average, businesses here invest much less per worker than they do in the
United States. With less investment in machinery and equipment, particularly
information and communication technology, workers in Canada have less and
older machinery and computers to work with. And weaker investment in
intellectual property means they have fewer new innovations to help them work
faster, smarter and more efficiently.

The deeper question is why have we had systematically less investment in
Canada than in the United States? Or, to put this question in the positive: How do
we make Canada more investable? Finding answers to these questions is critical
if we want to increase the non-inflationary growth rate of the economy and raise
the standard of living of Canadians.

Conclusion
It's time for me to conclude.

Price stability is our primary mandate, and a healthy labour market and price
stability go hand in hand. If employment is well below its maximum sustainable
level, the economy is missing jobs and incomes, and this puts downward
pressure on inflation, pushing it below the 2% target. That's what happened early
in the pandemic. When the economy is operating above maximum sustainable
employment, businesses aren't able to find enough workers to keep up with
demand, which puts upward pressure on prices and pushes inflation above the
target. That's where we were in 2022.

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Today inflation is much closer to the 2% target. And with some slack in the
economy, there is room for the Canadian economy to grow and add more jobs
even as inflation continues to move closer to the target. We are not yet back to
2%, and we can't rule out new bumps along the way. But increasingly, we look to
be on our way. Assessing the health of the labour market from various angles is
an important input into our monetary policy decisions.

Beyond the near term, a healthy labour market is critical to strong non-
inflationary growth in Canada. We have been successful at expanding our
economy by growing our labour force. To sustain this advantage, we need to
keep investing in an inclusive labour market, smart immigration, and a strong and
accessible education system. Let's not take these for granted as we tackle our
productivity problem.

Thank you.