Canadian Wages To Slow As Market Absorbs Excess Labor: BMO  – Better Dwelling

Over the past few years Canadians have repeatedly heard of a labor shortage. Policymakers have suddenly gone silent on the issue, and surprise—there’s now a massive surplus of labor. BMO warns the increased competition will produce higher employment and lower wages. Not great news for labor, but good news for the central bank looking for signs that inflation has been tamed.  

Canada’s Labor Shortage Is Quickly Turning Into A Labor Glut

Canada’s labor shortage is turning into a labor glut. The job vacancy rate peaked at 6.0% in April 2022 due to rates held too low for too long, stimulating excess demand. A few years later, it fell to 3.4% in April 2024, but the aggressive pursuit of workers hasn’t slowed down. The population has actually continued to see growth accelerate, leaving many unemployed workers.

“After a few years of serious shortages and capacity constraints, we’ve tipped in the other direction,” explains  Robert Kavcic, a senior economist at BMO. 

He adds, “That is, labour supply growth is running well in excess of the economy’s ability to absorb it with job growth. The result is a rising unemployment rate.” 

Canadian Unemployment Climbing Sharply As Excess Labor Piles Up

The unemployment rate climbed to 6.4% in June, up 1 point from a year prior. That works out to 1.4 million unemployed people in Canada, up a whopping 21.1% (+245.2k people) from last year.

Source: BMO. 

It’s worth taking a moment to appreciate what the above chart shows. Labor supply and demand were balanced going into 2020, and excess didn’t appear until 2022. It persists for roughly the period of low rates and excess stimulus, almost immediately beginning to resolve as rates begin to climb. Considering how often policymakers mention the labor shortage, the above chart probably isn’t what most expected. 

Canadian Wages Set To Slow, Good News For The BoC

Excess labor and shrinking worker demand will slow down wages in the not-so-distant future. Annual growth reached 3.7% in April. It’s not exactly a boom, but well above the 2.0% target inflation rate, which will work against wage growth soon. 

“While this hasn’t found its way into slower wage growth yet, the reality is that such transmission will take time. But forward-looking indicators suggest that firms are no longer struggling with a lack of labor (some exceptions apply), and they do plan to slow the pace of wage growth,” says Kavcic.   

This is not great news for labor, but it is good news for Canada’s central bank. Wages have contributed to above-target inflation by driving input costs higher. A particularly problematic issue for service inflation, which most recently accelerated. BMO sees excess labor as another factor that will put the Bank of Canada (BoC) at ease.

You Might Also Like