Labour Market Stalls in February

Key Insights

This week, the Bank of Canada opted against further interest rate hikes. This is despite a labour market, which over recent months has exceeded expectations, adding close to a quarter of a million jobs between October and January. Alongside flatlining GDP growth in the final quarter of 2022, today’s results signal that momentum may be waning and higher rates are working. The announcement by the Bank of Canada contrasted with the path set out by the Federal Reserve chair Jerome Powell, who this week signalled the need for more rate rises in the United States. The prospect of higher interest rates south of the border caused the U.S. dollar to strengthen, increasing the cost of imports for Canadians. Central bankers in Canada will be conscious that a widening gap between Canadian and U.S. interest rates risks devaluing the Canadian dollar further and stoking import-linked inflation.

Despite some signs of deceleration, wage growth is still hot. While rising wages allow households to navigate the rising cost of living, they also risk feeding inflation—especially when labour productivity is falling. In recent quarters, growth of employment and hours worked has outstripped output growth, a mismatch that has seen labour productivity decline in three out of four quarters in 2022. With little or no productivity growth, wage growth fuels consumer demand while increasing supply-side pressure by raising unit labour costs. It is, therefore, inflationary. The case for more productivity-boosting investment in Canada is not new. However, given the inflation risks created by the present wage–productivity dynamic, it is today perhaps more pressing than ever.

Job vacancies in Canada are trending down, indicating that Canada’s labour demand is moderating. The removal of most pandemic restrictions in the spring of 2022 led to a rehiring frenzy, pushing job vacancies to over a million. In December, this number had fallen to 750,000. While still roughly 50 per cent higher than the pre-pandemic level, job vacancies are expected to fall further as higher interest rates cool the economy. Sky-high labour demand has helped to keep the unemployment rate close to record lows over recent months. However, as labour demand pressure subsides and high levels of immigration add to labour supply, the shifting demand-supply dynamics in the labour market will exert upward pressure on the unemployment rate over 2023.