Unemployment Rate Slides Up Again in August

Key Insights

Job growth, particularly in the private sector, is in a rut. Labour demand has fallen steadily over the last 18 months with businesses responding to weaker demand for goods and services. The interaction between consumer spending and the labour market is mutually reinforcing. Slower job growth and rising unemployment negatively impact household incomes and spending. Meanwhile, slower revenue growth leads firms to hire fewer workers, constraining job growth. Breaking out of this loop requires sentiment among firms and consumers to improve. Economists have long recognised the critical role of sentiment in the economy. Falling interest rate should offer reassurance about price stability and the prospect of stronger growth soon. Nevertheless, both our Index of Business Confidence and Index of Consumer Confidence suggest the promise of better times ahead has yet to spur any dramatic improvement in sentiment.

The federal government has announced changes to the Temporary Foreign Workers program, reducing the ability of employers to recruit temporary foreign workers, particularly in urban centres. Amid a rising unemployment rate, housing market pressures and shifting public sentiment towards migration, the government’s strategy on temporary residents and the labour market is shifting, fast. The latest announced measures are part efforts to reduce the stock of temporary residents to 5 per cent of the population over the next three years. This represents roughly 750,000 fewer temporary residents in Canada. Such a sizeable decrease will affect employers who, in recent years, have benefitted from greater access to this ready source of labour. Policy makers will hope that constraining labour supply will push firms to seek out efficiency gains and ultimately stimulate productivity growth.

The labour market slowdown is disproportionately impacting younger workers. The unemployment rate for workers aged 15–24 years reached 14.5 per cent in August, the highest level in 12 years (outside the 2020 and 2021 pandemic years). Despite a slackening labour market, wages are proving to be sticky. Hourly wages among young workers have grown on average at a pace of 5.8 per cent over the last six months, outpacing wage growth among core-aged workers. Compared to prices, wages tend to respond more slowly to changes in the balance of supply and demand in the economy.  Facing with sticky wages firms may respond by job cuts and less hiring, which feeds unemployment. Reducing Canada’s youth unemployment rate will require a more concrete deceleration in wage growth, which we expect to see over the coming quarters.