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Despite a setback in January, Canada’s job market overall continues to show signs of strength. But that hasn’t necessarily lead to higher wage growth. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about why that may soon change.
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- James, in your latest report, you suggest the Canadian economy might not have to wait much longer to see wage growth pick up. But before we get into those details, where does Canada's labor market stand today versus pre-pandemic levels?
- Yeah. Thanks, Anthony. So, when we look at employment, like total employment in Canada, what we're seeing right now is that the level of employment, so the number of people that have jobs, is actually higher than we were before the pandemic. So, really good news on that front.
When we translate that into the unemployment rate, we're at about 6.5% unemployment rate right now. That compares to some of the worst levels of the pandemic, and it compares to about 5.7%, what we had before the pandemic. So there's a little bit more room to go. And some of that difference is due to the fact that we have labor force growth. We have population growth. So we've got to get not just the jobs that we had from the pandemic-- the jobs we lost in the pandemic, got to get those jobs back, but we also got to get jobs for the people that are entering the workforce.
So, at 6.5%, that's pretty decent. It's not too far from what we consider full employment. And it also takes into account the impact in January that we saw from the Omicron wave, where we lost 200,000 jobs in Canada in one month. And most of those jobs that were lost were in places like Ontario and Quebec where we had more stringent lockdowns.
So, the good news from that is that it definitely seems like these jobs that were lost recently are mostly due to temporary factors and should be coming back in February and March. So, we're looking in Canada like this is going to be a very strong labor market heading into the spring.
- OK. So for-- if we're looking at a strong labor market heading into spring, why so far, why have wages in Canada been lagging for many of the workers?
- Yeah, it's a great question. So that's really what everyone's sort of focusing on right now. Where we have wage growth at 2.5%, inflation is growing about 5%, unemployment rate's really low, why are wages not picking up? And some of this has to do with timing. The acceleration we've had in the labor market and also in inflation has been really swift.
You look back to where the unemployment rate was back at this time last year, so January 2021, we had above 9% unemployment rate. We had to get almost a million jobs filled to be able to get to where we are right now. OK. So that's a pretty significant amount of quick job growth. And so we were going from a really-- a labor market that wasn't very tight back at this time last year to one that's pretty tight right now. So, I think that's swiftness. And it takes a while for that unemployment rate or those employment gains to really play through into wages.
And also on the inflation side, the high inflation that we have right now really took a lot of people by surprise. It was only really last summer that we were talking about inflation starting to accelerate. And it really happened in December when we started seeing nearly 5% inflation rate in Canada. And that really moved fast. And I think when people were negotiating their wages, say in 2021, they weren't really banking on the fact that inflation was going to be as strong. And they didn't really know that the labor market was going to be as tight as it became.
- OK. So you mentioned inflation has been very strong, certainly. So what are some of the key drivers that could potentially accelerate wage growth for workers going forward?
- You know, I think just-- first off, passage of time. I think people realize that we have a tight labor market right now. They realize that the cost of living is increasing significantly. And so I think there's going to be a lot of bargaining power for workers that are employed right now and workers that are switching jobs. That is going to maintain itself and that should alone help out wages, but things like improvement in the unemployment rate, just more people working.
We're noticing there's a switch happening where people are going from part time jobs to full time jobs. And part time jobs usually have lower wage growth than full time jobs. So that's also a benefit. The ability of workers to switch from, say, a lower wage type of sector to a higher wage sector, that's been noticeable as well. So I think a lot of the trends that we're seeing right now in this current, really hot labor market, if they can maintain themselves, that's definitely going to go a long way.
Plus, if we are in fact past the worst of this Omicron wave, we're looking for a little bit more stability in the labor market. The people that lost their jobs in January will hopefully regain those jobs. More people will see some of these higher wages coming through. They'll come in off the sidelines of the labor market, start taking jobs as well. So what we see is that if things just continue along the path that we think they're going to go, wages should start catching up.
- OK. As you said, if things continue on that path-- when do you think Canadians can ultimately expect to see wages pick up?
- Yeah, so we did a little bit of analysis based on historical data. So we did a scenario analysis of three different scenarios, one where the unemployment rate stays around 6%, which is where it was back in December, one where it gets to 5.5%, and another one where it gets to 5%. And what we found, that it takes about six months to one year for wages to start showing up after a big gain in the unemployment rate like we've seen.
So what we're saying is that, yes, in 2021 at the end of the year, wages didn't keep up with inflation. But what we're finding right now is that by the end of 2022 we believe that wages should be reflecting this real strength that we're seeing in labor markets right now.
- Now, in your report you also highlight some other potential factors that could influence wage growth. Can you give us some examples?
- Yeah. So other than the fact that we need the labor market strength, so we need businesses to continue hiring people, inflation is going to play a big role. So the cost of living is something that people pay a lot of attention to. The price of food, the price of gasoline, all of that stuff goes into people's minds. It impacts people's wallets.
So where inflation goes-- does it decelerate back down to where-- to historical levels? Or does it maintain at elevated levels? I think that's going to be something that people are going to be paying attention to when they consider their wages and where they're going to go in the future.
And the other is how much productivity Canadians are able to improve upon. So productivity is, essentially, how much more we can produce given the same amount of time, the same amount of capital inputs we have. So, if I have a computer and I work eight hours a day, how much work can I actually produce? So we've seen some productivity improvements during bouts of the pandemic with people who are working from home being able to produce a lot more stuff.
But Canada and many other countries have been plagued by low productivity growth, and so that is something that we're going to be paying a lot of attention to. What is the productivity of Canadians over 2022? If they can produce a lot more for the same amount of hours they put in or with the same amount of capital, then they're going to be able to have more leverage for higher wages.
- James, a great report. Thank you very much for joining us.
- Thank you.
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- James, in your latest report, you suggest the Canadian economy might not have to wait much longer to see wage growth pick up. But before we get into those details, where does Canada's labor market stand today versus pre-pandemic levels?
- Yeah. Thanks, Anthony. So, when we look at employment, like total employment in Canada, what we're seeing right now is that the level of employment, so the number of people that have jobs, is actually higher than we were before the pandemic. So, really good news on that front.
When we translate that into the unemployment rate, we're at about 6.5% unemployment rate right now. That compares to some of the worst levels of the pandemic, and it compares to about 5.7%, what we had before the pandemic. So there's a little bit more room to go. And some of that difference is due to the fact that we have labor force growth. We have population growth. So we've got to get not just the jobs that we had from the pandemic-- the jobs we lost in the pandemic, got to get those jobs back, but we also got to get jobs for the people that are entering the workforce.
So, at 6.5%, that's pretty decent. It's not too far from what we consider full employment. And it also takes into account the impact in January that we saw from the Omicron wave, where we lost 200,000 jobs in Canada in one month. And most of those jobs that were lost were in places like Ontario and Quebec where we had more stringent lockdowns.
So, the good news from that is that it definitely seems like these jobs that were lost recently are mostly due to temporary factors and should be coming back in February and March. So, we're looking in Canada like this is going to be a very strong labor market heading into the spring.
- OK. So for-- if we're looking at a strong labor market heading into spring, why so far, why have wages in Canada been lagging for many of the workers?
- Yeah, it's a great question. So that's really what everyone's sort of focusing on right now. Where we have wage growth at 2.5%, inflation is growing about 5%, unemployment rate's really low, why are wages not picking up? And some of this has to do with timing. The acceleration we've had in the labor market and also in inflation has been really swift.
You look back to where the unemployment rate was back at this time last year, so January 2021, we had above 9% unemployment rate. We had to get almost a million jobs filled to be able to get to where we are right now. OK. So that's a pretty significant amount of quick job growth. And so we were going from a really-- a labor market that wasn't very tight back at this time last year to one that's pretty tight right now. So, I think that's swiftness. And it takes a while for that unemployment rate or those employment gains to really play through into wages.
And also on the inflation side, the high inflation that we have right now really took a lot of people by surprise. It was only really last summer that we were talking about inflation starting to accelerate. And it really happened in December when we started seeing nearly 5% inflation rate in Canada. And that really moved fast. And I think when people were negotiating their wages, say in 2021, they weren't really banking on the fact that inflation was going to be as strong. And they didn't really know that the labor market was going to be as tight as it became.
- OK. So you mentioned inflation has been very strong, certainly. So what are some of the key drivers that could potentially accelerate wage growth for workers going forward?
- You know, I think just-- first off, passage of time. I think people realize that we have a tight labor market right now. They realize that the cost of living is increasing significantly. And so I think there's going to be a lot of bargaining power for workers that are employed right now and workers that are switching jobs. That is going to maintain itself and that should alone help out wages, but things like improvement in the unemployment rate, just more people working.
We're noticing there's a switch happening where people are going from part time jobs to full time jobs. And part time jobs usually have lower wage growth than full time jobs. So that's also a benefit. The ability of workers to switch from, say, a lower wage type of sector to a higher wage sector, that's been noticeable as well. So I think a lot of the trends that we're seeing right now in this current, really hot labor market, if they can maintain themselves, that's definitely going to go a long way.
Plus, if we are in fact past the worst of this Omicron wave, we're looking for a little bit more stability in the labor market. The people that lost their jobs in January will hopefully regain those jobs. More people will see some of these higher wages coming through. They'll come in off the sidelines of the labor market, start taking jobs as well. So what we see is that if things just continue along the path that we think they're going to go, wages should start catching up.
- OK. As you said, if things continue on that path-- when do you think Canadians can ultimately expect to see wages pick up?
- Yeah, so we did a little bit of analysis based on historical data. So we did a scenario analysis of three different scenarios, one where the unemployment rate stays around 6%, which is where it was back in December, one where it gets to 5.5%, and another one where it gets to 5%. And what we found, that it takes about six months to one year for wages to start showing up after a big gain in the unemployment rate like we've seen.
So what we're saying is that, yes, in 2021 at the end of the year, wages didn't keep up with inflation. But what we're finding right now is that by the end of 2022 we believe that wages should be reflecting this real strength that we're seeing in labor markets right now.
- Now, in your report you also highlight some other potential factors that could influence wage growth. Can you give us some examples?
- Yeah. So other than the fact that we need the labor market strength, so we need businesses to continue hiring people, inflation is going to play a big role. So the cost of living is something that people pay a lot of attention to. The price of food, the price of gasoline, all of that stuff goes into people's minds. It impacts people's wallets.
So where inflation goes-- does it decelerate back down to where-- to historical levels? Or does it maintain at elevated levels? I think that's going to be something that people are going to be paying attention to when they consider their wages and where they're going to go in the future.
And the other is how much productivity Canadians are able to improve upon. So productivity is, essentially, how much more we can produce given the same amount of time, the same amount of capital inputs we have. So, if I have a computer and I work eight hours a day, how much work can I actually produce? So we've seen some productivity improvements during bouts of the pandemic with people who are working from home being able to produce a lot more stuff.
But Canada and many other countries have been plagued by low productivity growth, and so that is something that we're going to be paying a lot of attention to. What is the productivity of Canadians over 2022? If they can produce a lot more for the same amount of hours they put in or with the same amount of capital, then they're going to be able to have more leverage for higher wages.
- James, a great report. Thank you very much for joining us.
- Thank you.
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