Tiff Macklem: A measure of work
Remarks by Mr Tiff Macklem, Senior Deputy Governor of the Bank of Canada, to the
Winnipeg Chamber of Commerce, Winnipeg, Manitoba, 4 October 2012.
* * *
Introduction
Good morning and thank you for the invitation to speak here today. I am pleased to be in
Winnipeg, a city that is boldly preparing for the job market of the future. From programs that
help new immigrants, to connecting job opportunities with older workers, Winnipeg and
Manitoba are providing innovative solutions to the challenge of matching workers with jobs
and jobs with workers.
My remarks today will also focus on jobs.
The mandate of the Bank of Canada is to mitigate "fluctuations in the general level of
production, trade, prices and employment, so far as may be possible within the scope of
monetary action, and generally to promote the economic and financial welfare of Canada."
We learned from bitter experience in the 1970s that the best way for the Bank to fulfill this
mandate is to keep inflation low, stable, and predictable. Since 1991 - now more than
20 years ago - this objective has been formalized with an inflation target, and since 1995 the
target has been to achieve an annual rate of inflation of 2 per cent, as measured by the
consumer price index (CPI). The target is reviewed every five years and was most recently
renewed in 2011.1
With low, stable and predictable inflation, Canadians can have confidence in the value of
their money. That's one less thing they have to worry about. But there is more. Controlling
inflation is also a means to an end. Low, stable and predictable inflation paves the way for
solid economic growth and a well-functioning, stable and healthy labour market.
Having a job is one of the most important measures of an individual's economic and financial
welfare. How well, then, has our inflation-targeting monetary policy succeeded in mitigating
fluctuations in the level of employment? How have the benefits been distributed across
different segments of the labour market? How has monetary policy supported a
betterfunctioning or more efficient labour market? And what is the health of our labour market
today and its prognosis looking ahead?
I am going to address these questions in three parts. In Part 1, I will scan back over the past
four decades, comparing labour market performance in Canada before and after the
introduction of inflation targeting. In Part 2, I will focus on labour market outcomes through
the most recent cycle of recession and recovery. And in Part 3, I will comment on the
challenges and opportunities that lie ahead.
Labour markets before and after inflation targeting
A picture of inflation is worth a thousand words. As depicted in Chart 1, the change in the
behaviour of inflation since the adoption of inflation targeting is stark. Both the average level
and the variability of inflation have fallen dramatically.2 Since 1991, inflation in Canada has
averaged 2 per cent, as measured by the CPI, and its standard deviation has fallen by
roughly two-thirds, compared with the 1970s and 1980s (Table 1).
This low, stable and predictable inflation has been associated with more stable economic
growth in Canada and lower and less-variable unemployment. The average rate of
unemployment has fallen, and fluctuations in unemployment as measured by its standard
deviation have been reduced by about one-third.
Importantly, more stable growth since we began inflation targeting has reduced the cyclical
fluctuations in unemployment for workers in all age and educational categories. Moreover,
fortuitously, the most vulnerable workers have benefited the most (Table 2). Unemployment
rates for younger workers and those with less education are typically more variable than
those for well-educated prime-age workers. And it is these same groups that have
experienced the largest decline in variability with the adoption of inflation targeting. So the
benefits of greater stability have been shared across the workforce, and workers with the
largest fluctuations have seen the greatest improvement.
Better labour market outcomes over the past 20 years have also been accompanied by
improved labour market efficiency. The Beveridge Curve measures how well labour markets
are matching job vacancies with workers looking for jobs (Chart 2).The closer the Beveridge
Curve is to its origin (zero vacancies and unemployment), the more efficient the labour
market. As shown, the curve in the 1980s (blue line) has a higher level of unemployment for
a given level of vacancies than the curve in the 1990s and early 2000s (red line).3
Of course, improved labour market performance reflects a broad spectrum of public policies
and private sector initiatives, from employment insurance to education and training, active
labour market programs, procurement practices, and licensing and residency requirements
for employment.
Nonetheless, there is no doubt that better monetary policy has been an important factor. The
improved inflation environment has allowed consumers and businesses to manage their
finances with greater certainty about the future purchasing power of their savings and
income. Interest rates have also been lower and less variable in both nominal and real terms
across a range of maturities. And by working to stabilize inflation, monetary policy has helped
dampen economic cycles and mitigate fluctuations in employment.
In addition, there is direct evidence that low, stable and predictable inflation has improved the
efficiency of labour markets by eliminating inflation uncertainty as an important friction in
wage bargaining and allowing wage changes to provide genuine signals to market
participants regarding the demand for and the supply of workers.
As inflation has become more stable and predictable, the variability of aggregate wages has
declined. The standard deviation of labour income per worker has dropped by about 45 per
cent. At the same time, with less uncertainty about inflation, the distribution of wage changes
has narrowed. In the unionized private sector, the standard deviation across individual wage
settlements fell by about a third, improving the efficiency of the labour market and the
perception of fairness around wage setting.
In addition, since 1991, the average duration of labour contracts has almost doubled, from
about 20 months to 39 months, and there has been less need for cost-of-living allowances
(COLAs) in wage contracts (Chart 3). The number of labour contracts with COLA clauses
has declined from 21 per cent to less than 5 per cent.
Longer contracts and less disagreement about future inflation have also meant fewer strikes.
The hours lost to strikes peaked in the early-to-mid-1970s when inflation was at double-digit
levels and uncertainty was high. Since then, the time lost has fallen sharply (Chart 4). Total
hours lost to strikes fell by 66 per cent from the pre-inflation-targeting era to today. With
inflation low, stable and predictable, workers and firms are spending less time and fewer
resources negotiating and striking, and more time creating value and income.
Recession and recovery
Let's fast forward from the past 40 years to the past five. Many workers in Canada felt the
severe impact of the global financial crisis that began in 2007. When the United States fell
into recession, Canada was affected through trade, financial, and confidence channels. But
with our well-regulated financial system, a credible monetary policy framework and a record
of fiscal prudence, monetary and fiscal stimulus proved highly effective in dampening the
cycle and spurring the recovery.
Employment in Canada recovered quickly from the recession compared with previous
recessions or the experiences of other G-7 countries (Chart 5). Some 430,000 jobs were lost
in Canada during the recession. All of them have since been recouped and another 339,000
have been created.
This stands in stark contrast to the situation in the United States, where 8.8 million jobs were
lost and only about half have been regained (Chart 6). The U.S. unemployment rate
currently stands close to 1 percentage point above Canada's and a full 2 percentage points
higher when measured on a like-for-like basis. And more than 40 per cent of unemployed
U.S. workers have been out of work for more than six months, compared with only 18 per
cent of workers in Canada (Chart 7). Long-term unemployment is particularly worrisome
because workers who are out of a job for extended periods lose valuable job skills, making
them less employable and more likely to give up looking for work. Indeed, labour market
participation in the United States has declined by 2.5 percentage points more than it has in
Canada (Chart 8).
Some commentators have suggested that while the Canadian economy has created more
jobs, fewer manufacturing jobs and more service sector jobs have meant fewer high-paying
full-time jobs. True, the share of service sector jobs has risen while manufacturing has
declined. This is part of a longer-term trend. The share of employment in manufacturing has
declined steadily across all advanced economies and Canada's experience is about average.
But the rest of the argument is myth. Since the trough, the vast majority of the new jobs
created are full-time and in the private sector (Chart 9). And more than 90 per cent of them
are in industries that pay average or above-average wages (Table 3). These new positions
are in such fields as construction, utilities, health care and professional, scientific, and
technical services.
Gauging the tightness of the labour market is a key element in assessing how close the
economy is operating relative to its capacity, which, in turn, is an important indicator of
inflationary pressures. With a relatively quick recovery in employment, much of the slack in
the labour market following the 2009 recession has been taken up. Nevertheless, most
indicators suggest that some slack remains (Chart 10).
The unemployment rate remains above its pre-crisis decade average. The duration of
unemployment also remains above its pre-recession average and the number of people
working part-time who would prefer to work full-time has come down only slowly. And the
behaviour of wages is not pointing to generalized excess demand for labour. Wage growth
has been modest (Chart 11).
The labour market is an important component of the Bank's assessment of the amount of
excess supply in the economy. We continue to monitor the full range of labour market
indicators, together with other relevant information, very closely as we seek to achieve the
2 per cent inflation target.
To the extent that the economic expansion continues and the excess supply in the economy
is gradually absorbed, some modest withdrawal of the present considerable monetary policy
stimulus may become appropriate, consistent with achieving the 2 per cent inflation target
over the medium term. The timing and degree of any such withdrawal will be weighed
carefully against domestic and global economic developments.
The future labour market
In the five years since the start of the financial crisis, the most significant labour market
challenge has been creating enough good jobs for workers. Over the next five years, the
most important challenge is more likely to be finding enough good workers for jobs.
Even with some slack remaining in labour markets, firms are reporting - with increased
Business Outlook Survey
frequency - difficulty in attracting suitable labour. Our own
indicates that labour shortages have gradually moved up across the country. And in the
latest survey of small and medium-sized businesses by the Canadian Federation of
Independent Business, "Shortage of skilled labour" has moved ahead of "Insufficient
customer demand" as the top business constraint facing their members.4
Looking ahead, Canada's demographic trends will compound the scarcity of labour.5 We are
getting older, living longer and having fewer children. That means more workers retiring and
fewer people to replace them. This will put upward pressure on wages and lead to
adjustments to the composition and the nature of the labour force. For firms, attracting talent
while retaining relevant expertise and institutional knowledge will be more challenging.
Confronting this challenge requires working on three margins: expanding the labour force;
utilizing it more efficiently; and increasing labour productivity. Let me address each of these
in turn.
Expanding the labour force
Several segments of the labour force have potential for greater labour market participation.
Let me highlight three.
First, older individuals may be enticed to stay longer in the workforce. Indeed, this is already
happening. The labour market participation rate of workers over 50 has increased by more
than 12 percentage points since 1995.
This is being facilitated by the fact that Canadians are, on average, healthier than ever and
that more jobs today are knowledge-based. Corporate policies and technology that support
more flexible working arrangements, together with targeted training and employment
information programs, will be needed to further improve labour market access for aging
workers.
On this issue, I know I'm preaching to the converted here in Manitoba. The innovative
ThirdQuarter project initiated by you and your colleagues in the Manitoba Chambers of
Commerce, which is helping to match employers with experienced workers over 50, is the
sort of creative thinking we need to address our demographic challenges.6
Second - and this point is particularly important here in Manitoba - we must redouble our
efforts to address unemployment among Aboriginal people. Their unemployment rate is
above the Canadian average and their participation rate is lower. Moreover, the Aboriginal
population is growing faster and has a higher proportion of young people than the overall
Canadian population. Improving the access to jobs for Aboriginal people is the right thing to
do for many reasons. The demographic squeeze is just one more reason. This all points to
the importance of public and private initiatives to successfully launch the careers of more
Aboriginal people in the workforce.
And third, immigration is critical for the growth of the labour force. Without immigration, the
Canadian population would be expected to shrink over the next 50 years. And here again,
Manitoba is serving as an example for others. When the federal government introduced
Provincial Nominee Programs to influence the regional distribution of immigrants and allow
the provinces to address local labour needs, Manitoba took the lead in using the program.7
As a result, although foreign migrants to Canada are more naturally attracted to our largest
urban centres, Winnipeg, and Manitoba more broadly, punch above their weight at attracting
foreign migrants.
But attracting foreign migrants is only the first step. We must also tear down the barriers that
keep educated and skilled immigrants from contributing to their full potential. Recent federal
government initiatives to support improvements in the recognition of foreign credentials are a
welcome step. Employers also have a role to play in revising their own hiring practices.
Improving the efficiency of the labour market
The second margin is to get more of the labour force working.
This means ensuring that workers have the skills employers are seeking, which speaks to
the importance of ongoing dialogue between industry, labour and institutions for
postsecondary education.
It also means getting workers to where the jobs are being created. Migration has always
been an important adjustment mechanism for the Canadian economy and we see signs that
workers are, in fact, becoming more mobile. Recent Bank research suggests that long travel
distances across Canada may not be as great a barrier to labour mobility as they once were.8
Over the past decade and a half, people have moved from regions with excess labour to
those with the tightest labour markets, leading to the convergence of unemployment,
participation and employment rates (Chart 12). By 2011, the gap or disparity in employment
rates across the 10 provinces was at its lowest level since 1976 (as far back as data are
available) and not very different from the dispersion of employment rates across the United
States.
Nonetheless, barriers to interprovincial migration that are not related to distance, such as
differences in occupational licensing, remain an obstacle. The New West Partnership Trade
Agreement could be an important step to bringing down such barriers, as could the 2009
amendments to the Agreement on Internal Trade (AIT).
Improving productivity
The final margin is improving labour productivity. Indeed, over the longer term, productivity
growth has the greatest potential to boost prosperity. Regrettably, it is also where our
performance has been the worst.9
Productivity growth in Canada has ranged from disappointing to dismal. Since 2001,
Canada's productivity growth has slowed to historically low rates and has languished well
below U.S. rates. From 2000 to 2011, productivity growth in the Canadian business sector
averaged 1 per cent annually, compared with 2.4 per cent in the United States. As a result,
Canadian firms today are only 78 per cent as productive as U.S. firms.
While some aspects of Canada's productivity performance remain a puzzle, there are a
number of clear facts that point to obvious remedies.
Workers that have more and better machinery and equipment (M&E) to work with,
particularly information and communication technology (ICT), are more productive. And
Canadian businesses on average invest less in M&E and ICT than their U.S. counterparts.
Between 1987 and 2010, Canadian investment per worker in M&E and ICT averaged 76 per
cent and 58 per cent, respectively, of that invested in the United States. By 2010, on
average, Canadian workers had only about half as much M&E and ICT capital stock to work
with as their U.S. counterparts.
With a persistently strong Canadian dollar, a widening competitiveness gap, low interest
rates, strong balance sheets and increasing labour scarcity on the horizon, the imperative for
Canadian businesses to invest in M&E has rarely been more compelling. Recent investment
performance has been solid but not spectacular. We must do better than solid.
In addition to more M&E, workers need better skills. Canada has a well-educated workforce
that ranks favourably when it comes to primary and post-secondary education. However,
compared with U.S. firms, Canadian firms lag in the employment of workers with advanced
degrees, in the educational attainment of their managers, and in on-the-job training.
Canadian firms hire fewer employees with PhDs and other postgraduate degrees, especially
in the sciences. Only one-third of managers in Canada have a university degree, compared
with almost half of American managers.10 And only about a third of adult workers receive
jobrelated education and professional development training in Canada, compared with half in
the United States.11 Canadian firms need to put more emphasis on skills when hiring and
invest more in training to enhance the skills of existing workers.
There are also other aspects to strengthening productivity growth, including research and
development, innovation and developing new markets but I must conclude.
Conclusion
The health of the Canadian labour market is vastly improved since the 1970s and 1980s.
Low, stable and predictable inflation has been an important ingredient in this transformation.
And Canadians can continue to rely on the Bank of Canada to deliver on its inflation target
and, in doing so, support a better functioning and more stable labour market.
Canada's labour market has recovered from the recession better than most, and continues to
expand at a modest pace. Most of the jobs created since the end of the recession have been
full-time and in sectors that pay above-average wages. Much of the slack in the labour
market has been taken up, and firms are increasingly facing difficulty in finding suitable
labour. Nevertheless, some slack remains and can be expected to persist in the near term.
But looking ahead, as the slack is taken up and demographic trends slow the growth of the
labour force, continued labour-market health will depend increasingly on reducing barriers to
work, connecting workers with jobs, and facilitating a more mobile and more productive
workforce.
Thank you.
Charts and tables

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