Unemployment Rate Rises in August, the First Increase in Seven Months

By: Liam Daly

  • Employment fell by 40,000 in August, following little change in the previous month. The labour force participation held steady, while the unemployment rate rose to 5.4 per cent, the first increase in seven months. The job losses in August bring the cumulative employment decline since May to 114,000.
  • The performance across industries was mixed. Among the goods-producing sectors, employment gains in agriculture, utilities and forestry, fishing, mining, quarrying, oil and gas were outweighed by declines in construction and manufacturing. Among the service industries, employment rose in several industries, including finance, insurance, real estate, rental and leasing, as well as professional, scientific and technical services. However, the gains were offset by a marked decline in educational services.
  • Employment fell in three of the ten provinces. Declines were recorded in British Columbia, Manitoba and Nova Scotia. Employment rose in Quebec but remained effectively unchanged in the remaining provinces.
  • On a year-over-year basis, average hourly wages for all employees rose by 5.4 per cent. After holding steady last month, the rate of wage growth has resumed its upward trend. Spurred by tight labour supply, employers are also facing pressure to raise wages, given recent increases in the cost of living. Nevertheless, the prospect of a real wage cut this year remains as wage growth trails inflation.

Key Insights

This week, the overnight rate rose for the fifth time this year. The increase marks the latest move by the Bank of Canada in the battle against inflation. Higher interest rates will cause consumption and investment demand to weaken, which in turn will see firms hire fewer workers. High vacancy rates across the economy may provide a counterweight against job losses; nonetheless, we expect the unemployment rate to rise further in the months ahead. The extent of this rise will depend, in part, on the matching efficiency in the economy – the ability of the labour market to match job seekers to available jobs.

As wages rise, fears of a wage-price spiral have led to inevitable calls for restraint. Much to the dismay of labour organizations, the Governor of the Bank of Canada recently advised firms against building elevated inflation into future wage contracts. As rising prices squeeze Canadian household budgets, an additional round of inflation from a wage-price spiral would be unwelcome. However, news that corporate profits have soared is likely to only harden the resolve of unions as they enter wage negotiations. Fortunately, long-term inflation expectations appear stable, which should help to keep wage demands in check.

Slowing employment gains and the proliferation of vacancies signal an increasingly supply-constrained labour market. Strong levels of immigration and the recruitment of non-permanent residents, including temporary foreign workers, international students and refugees, should offer some relief. However, over the next decade, ongoing population aging means labour shortages are likely to persist, which will have important implications for economic growth. Growth relies on labour and capital inputs as well as technology. Amid a weakening labour input, productivity-boosting technological advances and capital investment will become increasingly critical for economic growth.