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Don’t be fooled by 7% unemployment – a labour shortage is coming

Pedro Antunes Pedro Antunes
Forecasting and Analysis

Originally published in the Globe and Mail on November 6, 2013

There is no crisis in the availability of workers in Canada, at least in 2013. The national unemployment rate is at 7 per cent, and there are more workers than jobs in some regions of Canada. Pressures on wages are muted in many occupations and regions, especially in Ontario.

The Canadian economy shed 430,000 jobs during the 2008-09 recession, and the labour market has yet to fully re-absorb all available workers displaced in the wake of the financial crisis. Youth employment, for example, is down by about 200,000 compared with pre-recession levels.

Yet in some occupations and skilled trades, the supply of workers is slim and pressure on employers is mounting. The unemployment rate has fallen to just 4.3 per cent in Alberta and Saskatchewan, and wage gains are once again strongly outpacing inflation.

The looming labour shortage has been long predicted. In fact, just a few years ago, it actually happened – and Canada was not well prepared for it.

In its Performance and Potential 2000-01 report, the Conference Board of Canada projected that the country’s labour shortfall could reach nearly one million workers by 2020. This figure has been often cited since then, but it has also been misunderstood; it does not mean that there will be a million unfilled job openings in 2020. It does mean that employers will have to change how they operate, given the available labour.

When employers cannot find all the workers they need, they respond by substituting capital (notably machinery and equipment) for labour, and/or reducing their production or services – the latter resulting in lower gross domestic product. Putting a number on the “shortage” gave a sense of the size of the problem – the pressure on labour markets.

In the report, the Conference Board said “the steep decline in labour force growth is at the root of the labour supply crisis that will develop in Canada around 2010.”

In reality, labour market pressures emerged well before that, especially in the West. From 2003 to 2007, a booming resource sector led to stronger-than-expected employment gains. This boom pushed up labour force participation and immigration, and it put employers under great pressure to hire the workers they needed.

By early 2008, the national unemployment rate was down to less than 6 per cent, levels not seen since the late 1960s. Most of the attention fell on the labour market pressures in Western Canada, but labour markets were tightening in all regions. By our estimates, the unemployment rate in Canada was very close to its absolute minimum in late 2007 and early 2008.

The 2008-09 recession gave employers some slack in the labour market, but it was only a temporary reprieve. The pressure has already returned in some parts of the country and among some occupations.

Furthermore, the retirement of the baby boomers is just starting. Of the nearly 10 million boomers, 30 per cent are late boomers aged between 48 and 52. While many plan to work longer, this will only delay the exodus of workers that is just budding, not prevent it.

During the decade before the recession, employment rose by 2 per cent a year in Canada. In the years to come, the pace will slow drastically. By the end of this decade, growth in employment will slow to well under 1 per cent a year, and to just 0.6 per cent annually by 2025. Employers will soon have to reduce their pace of hiring to less than one-third of what they were accustomed to before the recession.

Having fewer workers available will mean a fundamental change in how Canadian firms do business. Hopefully, this time, we will be better prepared.

Pedro Antunes is director of National and Provincial Forecast at the Conference Board of Canada.

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