The large labour shortage that has developed in Canada this year is likely only to be solved by an economic slowdown, suggests new research from TD Economics.
In a new report, the bank’s economists examine the surge in job vacancies that has emerged this year — topping 1 million open jobs at one point, according to data from Statistics Canada — and creating pressure to raise wages at a time when policymakers are fighting to curb high inflation.
According to TD’s report, the labour shortages are most acute in sectors of the economy that were hit hardest by the pandemic, where wages tend to be low.
Indeed, it noted that employment data from StatsCan shows that job growth since the start of 2020 has been strongest in higher-paying sectors, while poorly paid industries have seen weak or even negative growth.
“With many workers having left these sectors in search of higher pay, firms may be unable to fill these job openings,” the report said.
While the obvious solution to attracting workers for sectors with large shortages is raising workers’ pay, the kinds of pay hikes that would be required are simply too large, the report suggested.
“In order to make the wage rate in these sectors competitive enough to draw workers back, the wage adjustment would need to be several multiples of the current wage growth rate, and that is just not viable,” it said. “We can’t see firms in low wage sectors boosting wages enough to incentivize workers to come back.”
At the same time, for jobs where a shortage of skills is the issue, it would “take years” to retrain enough workers to fill those roles, the report said.
Instead, the labour shortage is likely to be addressed by slowing growth.
“The most likely solution to the job vacancy gap in Canada is an economic slowdown that reduces demand for workers and brings the labour market back into balance,” the report said.
With interest rates rising sharply, and growth slowing, there are already signs of increasing slack in the labour market, the report said, and this is expected to continue.
“Given our forecast for the Canadian unemployment rate to rise from 5.2% to 6.5% in 2023, this would imply that the vacancy rate should fall from 5.4% currently, to the 3% to 4% range,” it said.
“This will ease wage pressures and better enable the [Bank of Canada] to achieve its goal of bringing down inflation. Though we recognize that cutting job openings is less favourable to filling those jobs, it appears to be the most likely solution to fixing the vacancy gap in Canada,” the report concluded.