The lingering impact of Covid-19 is boosting employee absenteeism and driving higher labour costs, according to CIBC economists.
In a new report, the bank’s economists suggest that the low unemployment rate is somewhat deceiving as employers are getting less in terms of labour supply from their workforces due to an increase in illness-related absences in the Covid era.
“Indeed, the amount of supply the economy is currently getting from a 5.0% unemployment rate would be similar to what we could achieve from a roughly 6% jobless rate in 2019,” the report noted.
While employment has risen by about 3% since the onset of the pandemic, hours worked have only increased by 1.75%, the report said. This indicates that employers are getting fewer hours from their workforces thanks to increased absenteeism.
As a result, labour costs for companies have risen both due to more paid sick days and the need for additional workers to cover the absences, the report said.
“Unfortunately, the issue appears to have worsened in 2022 due to the continued circulation of Covid in the community and the resurgence of other illnesses,” it noted.
The good news, the report argues, is that the Bank of Canada may not need to see a significant increase in unemployment to cool inflation.
“As long as the health situation doesn’t become an even bigger constraint to supply, we should be able to see an easing of inflationary pressures without a large increase in the unemployment rate,” it said.
The report suggests that the pandemic may leave a permanent scar on the labour market.
“While some improvement on the health front is likely in the cards when warmer weather returns, Covid could represent a structural shift within the labour market,” it said. “Cold and flu seasons have always had a significant impact on the labour market year after year, and with Covid we have added another disease to the list.”
However, as long as things don’t get worse health-wise, this should reflect a one-time shift in labour costs, the report said.
And as the Covid effect is baked into labour costs, its diminishing effect on the annual inflation rate will help “to achieve part of the necessary deceleration in Canada’s CPI.”