The long and the short on labour shortages: How is Canada doing?

In March 2022, the number of job vacancies in Canada surpassed 1 million for the first time on record. This triggered widespread concern about labour shortages and Canada is not alone. As unemployment hits record lows, reports of shortages have become commonplace across OECD countries.

Canada’s COVID-19 context

With the COVID-19 emergency fading, Canada and many other OECD countries have seen a remarkable recovery in labour markets. Canada now has the highest working-age (15-64) employment rate on record at 75%. Unemployment is at near all-time lows for core age (25-54) workers at 4.3%, mature workers (55-64) at 5.0%, and youth (15-24) at 10.1%.

On the demand side, job vacancies have risen even more rapidly – up about 80% versus pre-pandemic. There are approximately 1.1 unemployed people for every job vacancy in Canada. This is by far the tightest labour market there in recent years.

These pan-Canadian figures mask wide variation across and within provinces. In Quebec and British Columbia there are fewer unemployed people than there are vacancies – a ratio less than 0.9. Across these provinces, labour demand in construction and the food and accommodation sectors are major drivers of the increase in vacancies. This reflects both the need for more housing as well as the return to normal social activities and travel.

At the other extreme, New Brunswick (2.0), PEI (2.5), and Newfoundland and Labrador (3.7) each have more than two unemployed people per vacancy. These figures largely reflect the structurally higher unemployment rates in Atlantic Canada. Despite the higher levels, these metrics are 50% and 75% tighter than pre-pandemic rates.

Around one unemployed person per job opening in most Canadian provinces

Why are labour shortages “bad” and when might they be “good”?

A “shortage” sounds bad. It is bad! We lack something that is needed; clearly we should get more of it. If we don’t, we could be facing a “crisis.” Yet such shortages bring both challenges and opportunities for workers, businesses and policy makers. This balanced perspective is often lost in media narratives around labour shortages, which is why I prefer the (far less catchy) phrase “labour market tightness”.

Let’s start with the bad news. When labour markets are tight:

• recruitment takes longer, diverting resources from other activities;
• slowed and/or reduced output; and
• there’s pressure to raise wages and prices, leading to cost-push inflation cycles.

A simple comparison of the available data shows a positive correlation between output growth and the growth in job vacancies across major sectors of the Canadian economy (see slide in my CEA presentation here). This makes sense – growing industries require more workers, so job vacancies increase.

Conversely, data for the three most recent quarters available (Q2-Q4 2021), when labour shortages rose to prominence in the media – show a negative correlation between two-year output growth and vacancies. Yet it does not necessarily follow that a lack of labour supply is hampering growth. It might simply mean that the hardest, client-facing hit sectors are now trying to ramp up operations faster than labour markets can adjust.

There are also potential benefits of labour market tightness, including:

• Increased long-term productivity as business innovate with more efficient processes and (in some cases) increased automation to avoid the rising costs associated with ongoing recruitment.
• Shorter periods of unemployment particularly for those working in less stable, typically lower paying sectors.
• Reduced income inequality (depending on the distribution of the tightness). Across Canada, demand for occupations with lower educational requirements (e.g., high school or less) is the fastest growing segment of job vacancies and have seen the fastest growth in offered wages.

Where do we go from here?

Although some of the labour-market tightness reflects the rapid recovery from COVID-19, much of it is due to long-run structural trends. Most notably this relates to slower population growth and the ageing workforce. Separating the short-term and long-term drivers of shortages is challenging.

Indeed, there’s a good deal of near-term uncertainty in the macroeconomic outlook. Some sectors are running hot, like professional services and construction. Others continue in their recovery from COVID-19.

We do not yet know which pandemic impacts will prove to be long-term or transitory. For example, will people return to eating out and travelling internationally as frequently as before?

Central banks around the world are committed to cooling off aggregate demand. If they do not orchestrate a “soft landing”, job losses will mount and concern about “shortages” will again be put on hold.

In the longer term, ageing populations, growing demand in technology and business services, and a renewed emphasis on reaching net zero will increase the demand for labour across many sectors. The era of ample labour supply is over. Placing a greater emphasis on employee retention policies and continuous training systems will prove more fruitful than ringing alarm bells about shortages.

Post available in french.

Read more at the OECD work on local labour market.

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