market in the form of underemployment – for example, people working part - time who prefer to work full - time. the duration of unemployment has also risen, which raises understandable concerns. when an individual is out of work, his or her skills tend to deteriorate, making reintegration into the labour market more difficult. the longer the period of unemployment, the more difficult it can be for the individual. for the economy as a whole, this can translate into higher structural unemployment. as i mentioned earlier, the deterioration in the labour market now appears to have ended, consistent with the resumption of gdp growth. both employment levels and average hours worked bottomed out in the summer, and the unemployment rate has since been hovering around 8. 5 per cent. against this backdrop, how quickly can the labour market be expected to improve? or, could canada experience a jobless recovery? conflicting forces are at play. on the one hand, history suggests that employment growth is relatively coincident with economic growth in canada, while improvements in the unemployment rate lag the cycle, because the more positive economic climate tends to pull more people back into the labour market. on the other hand, labour market behaviour has been somewhat unusual during this recession. employment held up relatively well, while hours worked fell particularly sharply. there is some evidence of what economists inelegantly call “ labour hoarding ” – the retention of skilled workers even if they may not be immediately needed. this suggests that employment may grow relatively slowly. indeed, the bank ’ s winter business outlook survey reports that the percentage of firms reporting labour shortages declined further, reaching its lowest level since the series began in 1998. with the scale of restructuring required, there may be reluctance to add personnel. canada is not the only country with large - scale restructuring. in the united states, the unemployment rate has jumped sharply, higher than the decline in gdp would have traditionally suggested, or by about 1 to 1. 5 percentage points. 9 at 10 per cent, it exceeds that of canada – the first time this has occurred since august 1981. 10 as in canada, there is substantial underemployment and rising long - term unemployment. 11 in addition, american job losses are unusually high in small and medium enterprises ( smes ) while they have been proportionally lower in canada, where smes have been supported by relatively strong domestic demand. unlike canada, however, u. s. productivity growth has surged, and wage

growth has slowed. the net result is lower unit labour costs, which have boosted competitiveness and should, ultimately, encourage job creation. canada ’ s productivity record is puzzling. the flipside of the apparent labour hoarding is that canada ’ s productivity growth fell in the latest recession – something that has not happened in any recession in the past three decades. 12 moreover, in sharp contrast to the united states, canada ’ s productivity performance was abysmal over the decade prior to the recession. kimberly beaton, “ time variation in okun ’ s law : a canada and u. s. comparison, ” bank of canada working paper, forthcoming. moreover, when the canadian unemployment rate is adjusted to match u. s. concepts, this would typically lower the canadian unemployment rate by about a percentage point. for example, the u. s. measure, published by the bureau of labor statistics, which includes discouraged workers plus marginally attached workers, stood at 11. 4 per cent in december 2009. see philip cross, “ the changing cyclical behaviour of labour productivity, ” canadian economic observer, january 2010, statistics canada. some of this undoubtedly reflects the restructuring of industries and the reallocation of capital and labour to new industries. some may reflect longer - tailed resources investments. there remains the possibility that firms have not yet anticipated intensifying global competitive pressures. while the bank does not entirely understand why productivity growth has been as slow as it has been, we do understand the consequences. slower productivity growth means that the rate of potential growth – the speed limit, if you will – of the canadian economy has fallen. this has implications for both the growth of canadian living standards and the conduct of monetary policy. to be more specific, the bank ’ s working hypothesis is that trend labour productivity declined by 0. 2 per cent last year, will rise by only 0. 2 per cent this year, and by a still - modest 0. 9 per cent in 2011. the combination of slower productivity growth and demographics could mean that the rate of potential growth for the canadian economy will be closer to 2 per cent going forward than the more than 3 per cent average rate we enjoyed in the first half of the past decade and the latter half of the 1990s. if this differential were to persist over a decade, the cumulative loss of income would be almost $ 30, 000 for every canadian. 13 inflation outlook the performance of the labour market and productivity growth will be important influences on monetary policy going forward.