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Bank of Canada governor Tiff Macklem says the country must not take its competitive labour market for granted, adding that with inflation much closer to two per cent, there is room to invest in new jobs without creating inflationary pressures.
“Beyond the near term, a healthy labour market is critical to strong non-inflationary growth in Canada,” he said on Monday during a speech at the Winnipeg Chamber of Commerce. “We have been successful at expanding our economy by growing our labour force. To sustain that advantage, we need to keep investing in an inclusive labour market, smart immigration and a strong and accessible education system.”
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Macklem said the pandemic severely disrupted the labour market, with the unemployment rate rising to a bit more than 14 per cent in May 2020. This was followed by the re-opening of the economy two years later, which led to record-low unemployment and a high job vacancy rate.
These dynamics have caused elevated wage growth that has still not fully gone away. Prior to the pandemic, the average year-over-year growth in unit labour costs was 1.9 per cent; today, it’s 5.4 per cent. Wage growth continued to be a top upside risk for some members of the Bank of Canada‘s governing council before the rate cut earlier this month.
“The fact that wages are moderating more slowly than inflation is not surprising; wages tend to lag adjustments in employment,” Macklem said. “Going forward, we will be looking for wage growth to moderate further.”
The unemployment rate was 6.2 per cent in May, but that rate is much higher for those aged 15 to 24 and newcomers at 12.7 per cent and 11.7 per cent, respectively.
Macklem said these workers are feeling the effects of slower growth more acutely, but it also means there may be some slack in the labour market.
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“That suggests the economy has room to grow and add more jobs without creating new inflationary pressures,” he said.
Macklem also highlighted Canada’s productivity problem. His remarks come just a few months after senior deputy governor Carolyn Rogers said the country’s productivity growth issue is reaching emergency levels.
Gross domestic product growth continues to be weaker here than in the United States, and Canada has struggled to increase its economic output per worker.
Canada does a better job at growing its economy by adding jobs, but that is not enough to fix its productivity problem, which comes from weaker investment in intellectual property, resulting in fewer innovations, less investment in machinery and equipment, and investing less per worker than the U.S.
“The deeper question is why have we had systemically less investment in Canada than the United States?” Macklem said. “Or, to put the question in the positive: how do we make Canada more investable? Finding answers to these questions is critical if we want to increase the non-inflationary growth rate of the economy and raise the standard of living of Canadians.”
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Speaking to reporters following his speech, Macklem highlighted that Canada’s regulatory regime remains an impediment for international investors and suggested getting rid of interprovincial trade barriers.
“We have too many small differences between provinces and the regulations of goods and services and the accreditation of different types of workers,” he said. “I’m not pretending it would be easy, but we created these barriers, we could get rid of them.”
• Email: jgowling@postmedia.com
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