Canadian labour market stalls as youth, newcomers struggle to find work

The Canadian labour market stalled in July as young people and recent immigrants struggled to find work and job creation continued to lag population growth.

The country lost 2,800 positions last month, Statistics Canada reported on Friday. Bay Street analysts had expected it to add about 25,000 jobs. The unemployment rate remained at 6.4 per cent, after ticking higher the two previous months.

The latest data show continuing slack in the labour market, which should keep the Bank of Canada on course for another interest rate cut next month, as it grows increasingly concerned about downside risks to the economy, analysts said.

Young people and newcomers are being hit disproportionately by weakness in the labour market. The unemployment rate for youth aged 15 to 24 hit 14.2 per cent in July while the rate for recent immigrants (people who arrived in Canada within the last five years) rose to 12.6 per cent. Immigrant youth are being squeezed especially hard, with the unemployment rate for this population hitting 22.8 per cent, up 8.6 percentage points from a year before.

Meanwhile, the employment rate for students aged 15 to 24 was 51.3, down 6.8 percentage points compared to the same month last year and lowest level for summer employment since 1997.

These numbers capture a key dynamic at play in the Canadian economy. The rise in unemployment over the past two years to 6.4 per cent from 4.8 per cent has been driven by population growth outstripping job creation rather than outright layoffs. In effect, workers with jobs have been relatively insulated while people looking for jobs have suffered from the economic slowdown caused by high interest rates.

The overall labour force participation rate – the proportion of the population either employed or looking for work – fell to 65 per cent from 65.3 per cent the month before. Statscan said this largely reflected trends among younger workers.

“Of youth aged 15 to 24 who were out of the labour force in July, 12 per cent wanted work but did not search, an increase of 2.6 percentage points compared with 12 months earlier (not seasonally adjusted). A more difficult labour market for young people may lead some to stop or pause their job search,” Statscan said.

Over all, the latest jobs numbers paint a mixed picture. Full-time employment increased by 62,000 positions while part-time employment fell by 64,000.

Hiring was stronger in the public sector, which added 41,000 jobs in July, led by gains in health care and social assistance, public administration, and educational services. By contrast, the number of private-sector employees fell by 42,000.

Average hourly wages continued to grow quickly on a year-over-year basis, although the pace slowed to 5.2 per cent from 5.4 per cent. The Bank of Canada has said repeatedly that this pace of wage growth is not compatible with inflation falling back to the bank’s 2-per-cent target, unless there is a significant pickup in productivity (output per worker).

“Stepping back, this report has a bit of a choose-your-own-adventure feel to it,” Toronto-Dominion Bank rate strategists Andrew Kelvin and Chris Whelan wrote in a note to clients.

“If you’re inclined to look for pockets of strength, the increase in full-time employment and hours worked both argue for resilient economic activity into the third quarter of the year, while wage growth remains objectively high at 5.2 per cent year-over-year.  If you prefer a more dovish interpretation, the fact that employment declined for the second consecutive month speaks to growing slack in the labour market, and there is nothing encouraging about the decline in labour market participation.”

A summary of the discussions at the Bank of Canada that took place ahead of last month’s interest rate cut, show monetary policy makers are paying increasing attention to slack in the labour market. Alongside other signs of economic stagnation, the rising unemployment rate is a signal that interest rates are too restrictive and need to drop if the central bank wants to avoid tipping the Canadian economy into a recession.

Financial markets expect the Bank of Canada to cut its policy rate by another quarter-percentage-point on Sept. 4, and traders are looking for additional cuts in October and December, which would bring the overnight rate to 3.75 per cent by the end of the year.

“For every weak spot in this release, there is some offset, rendering this report mostly a non-event for the Bank of Canada,” Douglas Porter, chief economist at Bank of Montreal, wrote in a note to clients.

“However, the key takeaway is that employment has not grown in the past two months, the jobless rate remains almost a percentage point higher than a year ago, and it has been a really challenging summer job market for students. This backdrop doesn’t increase the urgency of rate cuts, but it also does nothing to dissuade them.”