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By Don Drummond and Parisa Mahboubi

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Statistics Canada announces the unemployment numbers for December on Friday. Media reporting last month on the release of November’s numbers painted a picture of economic distress, given the jump in the overall unemployment rate from 6.5 to 6.8 per cent. But the alarmed response missed critical developments in the underlying data: the reality is that Canada has a dynamic and robust labour market characterized by extraordinary labour force growth and steady employment gains.

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Statistics Canada’s report on the November numbers provided crucial context: employment rose by 51,000 jobs from October to November, or 0.2 per cent, which is pretty good by usual standards. The “problem” was that the labour force grew by an unprecedented 138,000 people (or 0.6 per cent). As a result, the unemployment rate rose sharply even though employment grew more than respectably.

But this kind of disconnect between headline numbers and economic reality is particularly pronounced during periods of rapid population growth. From October to November, the number of people aged 15 and over grew by 80,000, while the labour force participation rate rose from 64.8 per cent to 65.1 per cent. (The “part rate,” as economists call it, is just the number of people either employed or looking for work as a share of the population.)

The year-over-year numbers are equally striking: Employment in Canada grew a robust 1.6 percent November-to-November, but this pace fell short of the 2.8 per cent increase in the labour force and the extraordinary 3.6 per cent rise in Canada’s working-age population. The result was a decline in the labour force participation rate and an increase in the unemployment rate from 5.8 per cent to 6.8 per cent. The real story here is that labour market is pumping out jobs yet struggling to absorb the influx of new entrants resulting from historically rapid population growth.

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On top of the big gains in employment, strong wage growth also testifies to the underlying strength of the labour market. Average hourly wages rose by 4.1 per cent year-over-year to November, outpacing inflation, which was 1.9 per cent.  Not only is the labour market generating jobs, it’s also offering higher-paying opportunities.

The challenge of integrating a rapidly expanding workforce is especially apparent in the labour market for young people (defined as those aged 15-24), where the unemployment rate was 13.9 per cent. Even so, youth employment rose by 2.7 per cent over the past year, while the labour force surged 5.5 per cent — making this group the fastest-growing segment of the workforce. The surge was driven by a remarkable 7.7 per cent increase in the youth population. The labour market has been creating lots of jobs for young people — 2.7 per cent annual growth is good growth — but it hasn’t managed to absorb everyone who wants an entry-level job.

In our current situation, relying solely on the unemployment rate as an indicator of how the economy is doing leads to seriously misleading conclusions. The rise in unemployment mainly reflects extraordinary growth in the labour force, driven by equally extraordinary population increases. It is not a sign of economic stagnation. Far from it.

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All this has implications for inflation and monetary policy. Declining inflation and rising unemployment would normally suggest the Bank of Canada should continue to cut interest rates. But strong employment and wage gains complicate the outlook. They may sustain demand pressures that wouldn’t normally be expected with the unemployment rate rising.

Our labour market dynamics over the next year or two will be affected by global economic uncertainty and by our own immigration policies, which recently pivoted toward trying to stabilize population growth. Whether that can be done remains to be seen. Canada faces significant challenges in managing immigration, including a large backlog of refugee claims and a surge in claims both from temporary residents with expired permits and from new waves of people fleeing unstable conditions in their home countries. If inflows continue at historically high rates — especially if the newcomers do not meet the requirements of Canadian jobs — the unemployment rate will continue to rise, even as employment grows.

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The Bank of Canada’s role is not to absorb any and all surges into the labour market in the short term but to create conditions for sustainable growth. The focus needs to shift from alarmist interpretations of the unemployment rate to strategies that harness Canada’s demographic dynamism for lasting economic success.

Don Drummond, Stauffer-Dunning Fellow at Queen’s University, is a fellow-in-residence at the C.D. Howe Institute, where Parisa Mahboubi is a senior policy analyst.

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