While inflation and an overheating economy is a top concern for many market watchers, economists at TD Economics caution that the labour market may take longer than expected to adjust to the effects of the Covid-19 disruption.
In a new report, TD economists examine the possible long-term impact of increased automation and digitalization — which helped many businesses weather the pandemic — on the jobs market.
“While the digital transformation has built up the economy’s resilience to the impacts of the health crisis, workers displaced by new technologies may have challenges finding employment in the post-pandemic economy,” the report said.
It warned that some jobs lost during the pandemic will never come back.
To the extent that trends, such as the sharp increase in online shopping and the shift to remote working, survive the pandemic, affected workers will have to be prepared to retrain and shift sectors, the report suggested.
“In this sense, the pandemic represents a labour reallocation shock,” it said. “Employment conditions are strong in some sectors, but weak in others. Individuals with skills in digital technology are likely to be in high demand, but those in more traditional retail roles may not be.”
The need to retrain displaced workers and the adjustment process that follows will likely take time, the report said.
It noted that there are currently almost 500,000 workers considered “long-term unemployed” — out of work for at least 27 weeks — which is near record levels and has historically taken years to repair.
According to the report, the last time long-term unemployment was this prevalent was in the early 1990s, and “it took nearly a decade to return to pre-recession levels.”
“While the pandemic recession is unlike past downturns as reflected by the rapid rebound so far in GDP and employment, skills erosion is still occurring. This suggests long-term unemployment will take time to return to pre-crisis norms,” it said.
TD’s current forecast is for employment to return to pre-crisis levels by late 2022, but this could take longer if the reallocation process proves bumpy.
“If the digital transformation is deeper, and more workers are permanently displaced by technology, it could take even longer for the labour market to recover,” the report said.
This would in turn delay the economic recovery, which would impact the Bank of Canada’s approach to monetary policy as well, the report suggested.
“In this scenario, economic slack would not be absorbed in 2022, and the bank will have little choice but to keep monetary policy loose until labour market conditions sufficiently tighten,” it said.
“The embrace of digital technology during the pandemic supported the economy through the depths of the health crisis. But as we look ahead, it could weigh against the employment recovery as the economy reopens,” the report concluded.
“Impacted workers will need time to find new jobs and develop new skills. Fiscal and monetary policy will need to remain supportive in order to ease the transition and return the economy to its full potential,” it said.