Canada’s U.S.-beating jobs recovery might not be as great as it looks

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One of the reasons more and more analysts and investors think the Bank of Canada will raise interest rates this week is Canada’s impressive hiring numbers over the past several months. But what if the labour market’s recovery from the COVID recession isn’t as good as it looks?

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Canada added 886,000 positions in 2021,  a record . That represents a faster return to normal than in the United States, a common benchmark for Canadian economic performance, where employment levels remain 2.3 per cent below pre-pandemic levels. Hiring trends in Canada are back to where they were at the start of 2020, at least according to the most popular employment survey.

But Canada trails the U.S. in other important metrics. America’s gross domestic product (GDP) rose to US$19.4 trillion in the second quarter, surpassing where it was at the end of 2019. Canadian GDP, however, was still 1.4 per cent below its pre-pandemic level of $2.12 trillion, according to Statistics Canada’s tally of economic output in the third quarter.

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The U.S. has benefited from stronger business investment, suggesting American companies are striving to become more efficient, while Canadian firms are choosing to keep up with demand by staffing up. The latter approach looks good in the short term, but the world’s largest economy could be in a better position in the long run because its economy could emerge from the pandemic more productive, economists said.

“This goes back to a sort of ongoing challenge in the Canadian economy of achieving stronger productivity growth,” said Brendon Bernard, senior economist at Indeed, a hiring site. “It has implications for the recovery because for Canada’s employment recovery to start delivering strong wage gains, especially compared to inflation, it’s tough to achieve that without strong productivity growth.”

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Statistics Canada’s consumer price index (CPI) surged 4.8 per cent in December from a year earlier, but the agency  estimated  that wages grew only 2.6 per cent over the same period.

Muted wage growth could relieve some of the pressure on the Bank of Canada to raise interest rates by keeping a lid on demand. But policy-makers would welcome more productivity-enhancing investment. That’s because an economy that is adding to its capacity to produce goods and services will be better able to smother inflationary pressures. The central bank has advanced its schedule for raising interest rates in part because lacklustre business investment over the past year has left the economy less able to keep up with spikes in demand.

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Canada’s labour productivity declined in the third quarter by 1.5 per cent, and was stagnant in the previous quarter, even as businesses began reopening and hours worked increased, according to data Statistics Canada  published  on Dec. 3. Meanwhile, in the U.S., output per worker dropped 5.2 per cent due to a surge in labour input costs, but it had otherwise been climbing since the fourth quarter of 2020, the Bureau of Labor Statistics  reported  on Dec. 7.

Weak productivity has been a drag on Canadian economic growth for years, but governments and executives have an opportunity coming out of the pandemic to fix systemic issues, especially within the labour market, said Lisa Raitt, a former cabinet minister in Stephen Harper’s Conservative government who is now vice-chair of global investment banking at Canadian Imperial Bank of Commerce.

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The excess cash businesses accumulated over the past couple of years could be used to increase investment, innovation and improve wages, all of which would help improve labour productivity, she said.

“That is what’s going to create better profitability, create more jobs and allow us to win on a global scale,” said Raitt, co-chair of the Coalition for a Better Future, a collection of more than 100 trade groups that is pushing politicians to focus on policies that will boost economic growth over the longer term. “It (will) make Canada a very attractive place for immigration and attracting talent. That again spurs innovation and productivity and entrepreneurship which will allow you to grow the economy.”

Canada’s hiring numbers are flattered by a bigger concentration of job growth in higher paid sectors of the economy compared with lower wage sectors, evidence that the recovery has been unequal. This is especially true for workers aged 25 to 54 across education levels, as there’s a gap between university-educated workers and those with a high school diploma or less.

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Higher paying industries in Canada have surpassed payroll levels by 3.3 per cent from before the pandemic, while in the U.S., employment in those sectors is still 1.7 per cent lower than before the pandemic. Likely fed up with repeated lockdowns that led to layoffs in many high-touch industries, such as restaurants, retail and tourism, some lower wage workers pursued higher paid jobs, said Bernard.

“It would be difficult for Canada to have seen the same recovery that we have seen if there wasn’t this shift because we still see in the most pandemic-exposed sectors, jobs are way down from pre-pandemic levels,” Bernard said.

In contrast, the United States has recovered more of its lower-wage jobs because its economy has been open for longer. As of October, employment in lower paying industries is 6.6 per cent below February 2020 in Canada, according to Statistics Canada’s monthly payroll survey, which lags the better-known Labour Force Survey by a couple of months. Comparable U.S. data show that low-wage employment is 4.2 per cent below pre-pandemic levels.

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To be sure, there could be other forces at work besides the duration of lockdowns. Schooling and child care tended to continue in some form, which could have boosted hiring in Canada, said Sri Thanabalasingam, a senior economist at Toronto-Dominion Bank. The share of parents and non-parents employed in Canada has surpassed pre-pandemic levels, up 1.8 per cent and 0.4 per cent, respectively, while in the U.S., there’s still a gap. Employment of non-parents is 1.7 per cent below February 2020 levels while mothers are 2.2 per cent below and fathers are 0.8 per cent under.

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It’s hard to pinpoint exactly what’s causing discrepancy between U.S. and Canadian GDP, Thanabalasingam said. Hours worked in the U.S. are up 7.4 per cent in the third quarter, while they’re only 2.9 per cent in Canada over the same period.

The state of the labour market and wages will be a tough balancing act for the Bank of Canada as it considers raising interest rates this year, possibly as soon as Jan. 26, when governor Tiff Macklem and his deputies end their latest round of deliberations. Macklem has said previously he wants to see a complete labour market recovery before applying the brakes on stimulus, but with inflation ending 2021 on a three-decade high, observers suspect the central won’t be able to wait.

It would help the Governing Council’s decision making if Canada’s productivity climbs, said Bernard.

“Otherwise, it’ll be tough to achieve the sort of sustained pickup in wages, which is the other leg of the Canadian recovery that we want to see really get bolstered now that the overall number of people working has returned to pre-pandemic levels,” he said.

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