Remarks
-
Carolyn A. Wilkins Senior Deputy Governor
Toronto Region Board of Trade
Toronto, Ontario
January 31, 2019
A Look Under the Hood of
Canada's
Job Market
Introduction
It is a pleasure to be here in Toronto today, and I'd like to thank the Toronto Region
Board of Trade for the invitation.
In many ways, 2019 has gotten off to a challenging start. What's happening in the
housing market here at home, lower oil prices, the trade conflict between the United
States and China, and Brexit are top of mind for all of us.
Canadians will be more confident facing these challenges if they feel secure in their
jobs. This is vital to your bottom lines as business people: without secure, good-paying
work, sooner or later demand for your products and services will suffer.
For central bankers like me, the job market is a bellwether of financial health and a
useful gauge of inflation pressures. And by many measures, the labour market in
Canada is in good shape. The unemployment rate is at its lowest level in records going
back more than 40 years. Firms across the country tell us that it's difficult to fill
openings. I suspect many employers here in Toronto can relate.
These are signs of labour market strength. Certainly, many are benefiting from the
positive overall environment. Not everyone is, though; recent layoffs in the auto sector
have touched many families in this region, and there have been layoffs and closures
elsewhere in the country. Moreover, wages overall in Canada are not rising as fast as
we would expect given how low unemployment is.
Today I will look under the hood of the Canadian labour market to answer a few
important questions:
•
How well is the job market really doing?
• don't they
If firms are finding it so tough to fill jobs, why just offer higher wages?
•
What structural factors could weigh on wage growth going forward?
The answers to these questions will help the Bank find the right path for interest rates to
meet our inflation objective. They will also help businesses and governments develop
Canada's prosperity over the longer term.
strategies to boost
So, how well is the job market really doing?
start with a few basic facts.
Let's
Last year, the economy added a net 163,000 jobs, all full-time positions. The
unemployment rate fell to 5.6 per cent, a historic low. The participation rate for
primeage workers (those aged 25 to 54) is around 87 per cent, near its all-time high.
If that sounds positive, it's
because it is. However, it raises the question for the Bank of
Canada of whether the job market is at a point where inflation pressures are starting to
"natural" the rate
build. If you use the trend or rate of unemployment as a guide-that's
that puts neither upward nor downward pressure on inflation-then, at first glance, the
That's because our most recent staff analysis puts Canada's
answer could be yes.1
trend or natural rate of unemployment in the range of 51⁄2 to 61⁄2 per cent.2
However, I think this conclusion would be too hasty. The natural rate of unemployment
is like dark matter in physics. Estimates are subject to great uncertainty, perhaps even
more so than with other useful economic concepts like potential output. They also move
around as the structure of the economy changes. The natural rate of unemployment in
Canada was estimated to be around 9 per cent during the 1990s-it was brought down
in large part by labour market reforms, although estimates in real time only captured
these changes with a lag.3
1
The term "non-accelerating inflation rate of unemployment," or NAIRU, is often used interchangeably with
"natural rate of unemployment." NAIRU comes from a framework that includes an "accelerationist" Phillips curve.
Accelerationist Phillips curves are no longer commonly used and are not a part of the Bank's main macroeconomic
models. The reason there is a trend or natural rate of unemployment is because unemployment would never fall to
zero since, in a well-functioning labour market, there is always some degree of job turnover.
2
See D. Brouillette, M.-N. Robitaille, L. Savoie-Chabot, P. St-Amant, B. Gueye and E. Nelson, "The Trend
Unemployment Rate in Canada: Searching for the Unobservable," Bank of Canada Staff Working Paper
(forthcoming).
3
The experience of other countries is very similar. Estimates of natural rates of unemployment have fallen over
the past two decades. For example, the Congressional Budget Office's estimate for the US natural unemployment
rate has fallen from a peak of around 6.2 per cent in the late 1970s to around 4.6 per cent now.
"full" or
This uncertainty means that it is imperative to look beyond such measures of
maximum employment toward other indicators of labour market slack. In this instance,
the Bank has pointed to relatively subdued wage growth as a possible sign that the job
market may have more room to run.
Economic theory tells us that when the actual jobless rate is at the natural rate, an
economy is essentially at full employment. At that point, we would expect wages to be
rising at the same pace as the target inflation rate plus the trend rate of productivity
growth. This is because the strongest underlying factors that determine worker pay in
to an employer's production
real terms are how productive workers are and their value
process.4 So, for Canada, this implies wage growth of around 3 per cent-2 per cent for
inflation and 1 per cent for trend productivity growth.
Wage growth has picked up considerably to average about 21⁄2 per cent in 2018,
compared with 2 per cent over the past five years.5 But we are still shy of what one
would expect in a tight labour market.
The story is similar in the United States. The US jobless rate has been below 4 per cent
for a while. This is much lower than the estimate of the US natural rate-currently
pegged at around 41⁄2 per cent.6 Yet, wage gains only recently reached the sum of
inflation and productivity growth.
In Canada, regional and sectoral factors can explain a lot of why wage growth has been
tame. The steep drop in oil prices that occurred in the second half of 2014 had an
impact that rippled across Canada and is still being felt. Wage gains in energy-intensive
regions continue to lag behind those in the rest of the country.
To give you a sense of how big a deal this is, wage growth in the third quarter of 2018
was just under 2 per cent in Alberta, Saskatchewan, and Newfoundland and Labrador. It
was about three-quarters of a percentage point higher in Ontario and Quebec, so closer
to the 3 per cent one would expect.
4
For more detail on how wages are determined, see The Economy, Plain and Simple article that we released today.
5
This is according to the Bank of Canada's composite wage measure, called the "wage-common." This measure is
created by extracting the common signal from four sources of wage data (the National Accounts; the Productivity
Accounts; the Survey of Employment, Payrolls and Hours; and the Labour Force Survey) and filtering out
indicatorspecific movements. See D. Brouillette, J. Lachaine and B. Vincent, "Wages: Measurement and Key Drivers," Bank
of Canada Staff Analytical Note No. 2018-2 (January 2018); and J. Lachaine, "Applying the Wage-Common to the
Provinces," Bank of Canada Staff Analytical Note No. 2018-16 (May 2018).
6
For further detail, see Congressional Budget Office, "The Budget and Economic Outlook: 2019 to 2029" (January
2019). Differences in Canadian and US unemployment rates stem from differences in how statistics agencies define
unemployed workers and those not participating in the labour force. For more detail, see R. Bender, "Measuring
Employment and Unemployment in Canada and the United States - a Comparison," Statistics Canada (January 18,
2016).
That divergence makes sense when you consider that investment and jobs in
energyintensive regions respond to oil prices. In fact, there was a massive increase in
employment in these regions from 2000 to the end of 2014, and they led wage growth.
With much lower oil prices since 2015, employment in the oil and gas sector has fallen
by about 20 per cent-that is about 30,000 jobs.
Other goods-producing sectors, such as manufacturing and agriculture, are also
becoming less prominent employers.7 Instead, a range of service sectors have
contributed to job growth, in exactly the places you would expect given longer-term
trends. Digitalization has led to a burst of jobs in computer system design-up by
around 40 per cent over the past five years. There has also been a boom in
healthrelated jobs, particularly elder care.
Almost all the jobs created in services have been full-time, and about two-thirds have
been in industries that pay higher-than-average wages. Over the past year,
servicesector wage gains were much stronger than those in the goods sectors.8
Yet, even after accounting for these regional and sectoral factors, wage growth overall
is still a bit short of what one would expect at this stage.
This is particularly puzzling when you consider what businesses are telling us about
Business Outlook Survey
how hard it is to fill jobs. Firms in our latest reported one of
the highest levels of labour shortages since the Great Recession. And job vacancies
continue to rise, now totalling about 550,000.
Why aren't labour shortages driving up wages?
If the right workers are so hard to attract, why not simply offer more money? Many firms
are doing just that. However, other factors must be holding back wages, or the national
numbers would be higher. As far as I can tell, no one has found a smoking gun. But
there are at least a couple of compelling suspects.
The first is that it might be difficult to find the right person for the job. Attracting the right
talent is rarely just about money. I can tell you, in my business it is not easy to find all
the specialized talent the Bank needs. Estimates suggest that about 1 out of every 10
jobs in Canada is affected by mismatches between the skills that the job requires and
the skills that workers actually have.9 The sectors with skills shortages are no surprise:
health care and the digital economy top the list. Meanwhile, sectors like manufacturing
and natural resources have a surplus of people with the required skills.
The second suspect is a sense of caution. People may be reluctant to search for a
better job even if they would like one. The data bear this out. Turnover in the Canadian
job market, a process known as job "churn," is relatively low these
days.10 Higher churn
usually means higher wages, because the people willing to change jobs-to trade up-
typically drive wage gains in the economy. Job churn is especially sluggish in
oilproducing provinces, where wage gains have been most restrained.11 As a comparison,
job churn in the United States has recovered more quickly, in part because the oil price
shock was positive for the US expansion. That churn has supported US wage growth.
Another suspect is geography. Canada is a beautiful country, but its sheer size does not
help. The data show that Canadians have become more open over the past few
decades to relocating for new opportunities.12 Still, it is no small thing to pull up stakes
and move to a new city or province, often far from friends and family. If you are
fortunate enough to find a job that is a good match for your skills and ambition, you still
have to ask yourself: Will housing be affordable? Will the commute be a nightmare? Will
my partner be able to find meaningful employment too?
I'll bet a few people in this room have had prize candidates slip away once they realized
that they could not afford Greater Toronto Area housing prices, or were not keen to
spend hours commuting to work every day if they lived further out.
As the expansion continues, history tells us that job churn will pick up as employment
continues to grow. This should lead to more employers finding it necessary, and worth
their while, to offer higher wages.
10
Job churn is technically the sum of all workers who change jobs from an existing job, enter the workforce by
obtaining a job, leave their job (voluntarily or not) or quit the labour force altogether (e.g., through retirement or
becoming a discouraged worker). Aside from the lingering effects of the oil price shock, the aging workforce may
also be contributing to slow job churn. Older workers tend to value stability more than younger workers do.
11
See O. Kostyshyna and C. Luu, "The State of Labour Market Churn in Canada," Bank of Canada Staff Analytical
Note No. 2019-4 (January 2019).
12
Interestingly, labour mobility has increased significantly in the last 20 years. Bank staff have found that the mean
absolute difference in employment rates between provinces has converged to be the same as the difference
between US states. See D. Amirault and N. Rai, "Canadian Labour Market Dispersion: Mind the (Shrinking) Gap,"
Bank of Canada Staff Analytical Note No. 2016-3 (March 2016).
What structural factors could weigh on wage growth going forward?
All that said, some forces that have been weighing on wage growth are structural, and
therefore are likely to persist. In fact, these forces are not unique to Canada; they are
being felt in many advanced economies.13
How innovation is playing out in the global economy is at the centre.
Technological advances have lowered demand for many types of routine jobs, both
cognitive and manual, in all advanced economies, including Canada. These losses have
been more than offset by jobs in other sectors that are experiencing stronger
employment and wage growth. High-tech workers are the most obvious example. At the
same time, more and more workers have to compete for jobs with people around the
world as firms work to stay competitive in global markets.
of "superstar"
Another effect of the most recent wave of innovation is the rise firms that
are making the competitive landscape more challenging.14 While issues around market
power are hardly new, control of valuable consumer data and of electronic platforms
can act as modern impediments to competition. When a few firms dominate an industry,
or a firm becomes the only major employer in town, workers have little choice but to
stay in their jobs regardless of wages or other labour conditions. Consequently, those
firms may feel less pressure to raise wages for many of their workers even as the job
market tightens. It is not just digital firms: concentration is growing across many
industries in some countries, including Canada and the United States.15 Because
workers' wages have
not kept pace with gains in productivity over the last few decades,
their share of income has fallen, particularly in the United States but also in Canada.
The relationship between employers and workers has also changed. We know that
employers are making greater use of employment agencies and short-term contractors
13
See A.-K. Cormier, M. Francis, K. Hess and G. Poulin-Bellisle, "Drivers of Weak Wage Growth in Advanced
Economies," Bank of Canada Staff Analytical Note No. 2019-3 (January 2019).
14
Autor et al. (2017) document evidence showing that US industries have become more concentrated on average
(see D. Autor, D. Dorn, L. F. Katz, C. Patterson and J. van Reenen, "The Fall of the Labor Share and the Rise of
Superstar Firms," National Bureau of Economic Research Working Paper No. 23396 [May 2017]). De Loecker and
Eeckhout (2018) show that firm markups have risen globally, a sign of weaker competition, particularly in North
America and Europe (see J. De Loecker and J. Eeckhout, "Global Market Power," National Bureau of Economic
Research Working Paper No. 24768 [June 2018]).
15
The rate of industrial concentration for Canada, specifically, is historically high: economists at Innovation,
Science and Economic Development Canada estimate that the median concentration of Canadian industries in the
early 2000s was about 75 per cent higher than in the United States. See M. Duhamel and S. Crépeau, "Competition
Intensity in Canada: A Critique of Recent OECD Findings," Industry Canada Working Paper No. 2008-09. In the
United States, such "monopsony" power can be seen in the use of no-poaching agreements among firms and
noncompete contracts for workers. These are less common in Canada, but for the US experience see A. B. Krueger,
"Reflections on Dwindling Worker Bargaining Power and Monetary Policy" (luncheon address at the Jackson Hole
Economic Symposium, Jackson Hole, Wyoming, August 24, 2018) and the references there-in.
to replace salaried employees. Unionization rates in the private sector are down. And
we hear from labour market experts that this has changed the social contract between
companies and their workers.
The gig economy has also created a new set of jobs in Canada and elsewhere that
reduces the bargaining power of workers as well. These non-standard jobs may have
advantages, such as the ability to work as needed-Uber drivers come to mind-but
many workers in these jobs indicate that they would prefer more stability. A recent Bank
survey of Canadians found that roughly one-third of respondents were participating in
some form of non-standard or gig employment.16 For many it was as a side job to top up
income. These workers were more likely to be young and to live in provinces where
jobless rates are historically high. By our count, the number of people in Canada doing
non-standard work because of weak economic conditions who would rather be doing
something more formal is equivalent to about 700,000 full-time positions.
To be sure, monetary policy can do little to directly influence structural issues affecting
the labour market and the wider economy. My job is to keep inflation low and stable so
that people like you in the business community can operate in a predictable
environment that supports sustainable economic growth.
That said, there is considerable scope for other public policies, and for businesses, to
enhance the long-term prosperity of workers-your customer base-and by extension
the economy.
We all recognize the importance of investing heavily in the right skills for the digital
economy, and for other growing sectors like elder-care services. While governments
may be on the front lines, businesses need to play a stronger role in partnering with
schools and universities. We want more students to gain pertinent experience and to
develop the working relationships that foster entrepreneurship. This has been
happening for years. For instance, about two-thirds of University of Waterloo students
are in co-op placements with firms across Canada. Other schools, such as Carleton
University, are expanding their links to locally based tech industry leaders. And it does
not stop once you have made the hire. More businesses need to invest in their
employees throughout their careers. Many tell us that is exactly what they are doing,
through intensive in-house training.
What is less prominent in discussions on how to improve the job market is supporting
worker mobility-this would help businesses attract the right people for the job.
Affordable housing is front and centre. It is to a large extent an issue of supply. Then
there is the issue of transportation infrastructure in major job markets. And supporting
mobility also includes removing barriers to interprovincial trade.
let's not forget that
Finally, the competitiveness of Canadian businesses is at the
foundation of a robust job market. The tax changes made by the federal government
last autumn are a positive step in this regard and should lead to more investment in
capacity and productivity. Higher productivity would make it easier for wages to rise
faster without increasing inflation pressures. Strategies geared to developing and
adopting new technologies in a digital and data-driven economy-across all sectors-
will also be critical to our economic potential.
Conclusion
It is time to wrap up.
Despite a challenging start to the year, the labour market in Canada is in a solid place
overall. It is worth looking under the hood of the job market to better understand
what strategies might add to Canada's
emerging inflation pressures and prosperity.
Some of the weakness in wage growth can be explained by continued adjustment in
energy-intensive regions to lower oil prices. There are also some structural factors both
inside and outside Canada that may continue to weigh on overall wage growth.
That said, we also need to be mindful of stronger wage gains and signs of labour
shortages in other parts of the economy. Monetary policy must be forward-looking. As
you know from our latest outlook published a couple of weeks ago, the recent weakness
in oil prices and softness in housing mean that we expect growth to slow temporarily.
We expect the economic expansion to pick up again after this detour, in the second
quarter of 2019. This should lead to a pickup in wage growth as well.
There are risks on both sides of this outlook, so we will continue to pay close attention
to wages and to other developments that are driving our projection for inflation. This
includes how oil prices, the Canadian housing market and global trade policy evolve.
Rest assured that the Bank of Canada will do its part to meet our inflation objective.
And as I've just discussed, businesses and governments can help build an even more
vibrant job market by investing in education and training, encouraging labour mobility,
and improving the competitiveness of Canadian companies.