Why Canada’s Labor Market Isn’t As “Healthy” As It Seems

Bank of Canada should be careful not to overemphasize jobless rate, CIBC says

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Good morning,

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We all know the pandemic has changed the way we work, but what we may not know is how the damage wrought by COVID-19 continues to affect our job market.

Canada’s December hit jobs numbers came as a surprise. The gain of 104,000 jobs exceeded economists’ expectations by a mile and increased speculation that the Bank of Canada might raise its rate again this month to further calm the economy and inflation. The unemployment rate fell to 5%, one of the lowest on record.

But a closer look at the details reveals that all is not as it seems in the Canadian labor market. Although employment has increased by more than 3% since the start of the pandemic, working hours have only increased by 1.75%, CIBC economists Andrew Grantham and Karen Charbonneau said in a recent report. .

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“The Bank of Canada should be careful not to overemphasize the unemployment rate as a sign of excess demand within the economy,” they said.

“The ‘health’ of the Canadian labor market over the coming year will also be influenced by the evolution of COVID and other respiratory illnesses we are currently facing.

What has changed is that people’s actual working hours are much lower than pre-pandemic levels due to higher levels of absenteeism.

“Companies are getting less for their money, or fewer hours actually worked per employee,” the economists said.

Employee sick leave has increased in 2022 as COVID-19 continues to circulate and other illnesses reappear. Economists calculate that more than 0.4 hours more per employee was lost in the fourth quarter of 2022 compared to the average between 2017 and 2019.

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At the same time, workers are making more use of their annual leave, although this has still not reached pre-pandemic norms.

“If vacation time were not still below pre-pandemic standards, the hours lost due to illness and family needs alone would be equivalent to requiring about 230,000 additional employees,” the economists said.

This means that the real supply of labor that the economy draws from a 5% unemployment rate is “significantly lower” than it would have been before 2020. Due to lost hours, the economy currently gets a supply of labor equal to 6 percent unemployment rate, pre-pandemic.

“If employees continue to normalize their vacation usage, but time lost due to illness or family issues does not improve, labor supply would equate to an unemployment rate of 6.2 % before the pandemic,” the economists said.

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The lack of hours worked also helps explain the country’s high vacancy rates. Economists say their estimate of hours lost due to illness or family problems would have increased vacancies by 60,000, or about a quarter of the excess vacancies currently seen in the economy compared to the pre-pandemic period.

Sectors where work cannot be done from home, such as education, manufacturing and construction, have been hardest hit by this shortfall.

While education has historically seen higher levels of absenteeism due to illness, this is not the case for manufacturing, construction and mining.

Additional paid sick leave also increases payroll costs. CIBC estimates that these costs increased by 0.5% to 0.9% solely due to the time paid to employees who are absent due to illness or family reasons.

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And when employers have to hire more staff to cover those who are absent, it further tightens the labor market and increases wage pressures.

If the health situation improves dramatically in the spring, the vacancy rate could fall rapidly and the unemployment rate could rise even if there is no change in demand, economists believe.

However, it is also possible that “COVID could represent a structural change within the labor market,” they said.

Cold and flu seasons have historically had a significant impact on work every year, and now COVID has been added to that mix.

“The good news is that this should largely represent a one-time increase in labor costs relative to pre-pandemic normal,” the economists said. “Until the health situation becomes an even bigger supply constraint, we should be able to see inflationary pressures easing without a sharp rise in the unemployment rate.”

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One thing that has caught the attention of economists and traders lately is the rise in copper prices.

Copper ended the week on January 13 with a 7% gain to US$9,190.50 a tonne, after hitting a seven-month high the day before at US$9,240.

BMO chief economist Douglas Porter said part of the rally was due to a weaker US dollar. His chart shows the recent ascent of copper in US dollars and euros and you can see that the latter’s recovery is a bit less impressive.

However, the big driver of the recovery is the reopening of China, the world’s largest consumer of metals.

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WisdomTree analyst Nitesh Shah told Reuters that the prospect of increased Chinese demand is pushing prices higher and “more than $10,000 (per tonne) should be readily available.”

It could also be good news for the global economy. The metal, known as “Doctor Copper”, is considered an unofficial indicator of the health of the economy as it is a raw material used in many sectors and products.

“The recent rally in ‘metal with its Ph.D. in economics’ highlights the global growth outlook for this year,” Porter wrote.


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As interest rates rise, it’s time to reassess how much debt your household can handle. Investment Advisor Rita Li has questions you should ask yourself when allocating money to debt repayment, savings and investments. Learn more


Today’s Posthaste was written by Pamela Heaven, @pamheavenwith additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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