Although the recent flood of newcomers to Canada has pushed up GDP, Canada’s economy is in the doldrums, with falling real per capita incomes and rising unemployment. Seeing good progress with inflation, the Bank of Canada on Wednesday cut its policy rate by another quarter per cent. That was the right decision. But monetary policy can’t solve our growth problems all on its own. We need better economic and fiscal policies, which the federal and many provincial governments are failing to provide.
Last week Statistics Canada reported that GDP per capita had declined again in the second quarter. This isn’t a one-off trend: we’re on a losing streak of five straight quarters. Over the last two years, real GDP per person is down 4.1 per cent — from $61,300 to $58,700 (measured in 2017 dollars).
Economists are right to focus on poor labour productivity as the source of our generally terrible economic performance. GDP per hour worked hour has dropped 2.8 per cent in the past two years, explaining about two-thirds of the decline in GDP per person. But we often forget that per capita GDP depends on employment as well as productivity — not just output per hour but also the total number of hours worked. If people are working less, per capita GDP shrinks even if labour productivity doesn’t change.
A saving grace of the recent plummet in the job vacancy rate, which is down to 3.1 per cent from 5.9 per cent two years ago, is that it has probably improved productivity: businesses are finally finding workers they need — although not for every sector or skill. Total vacancies are 554,000, about two-fifths the number of people who are out of work. Some sectors do still have relatively high vacancy rates, including agriculture, fishing and forestry (combined rate of 3.6 per cent), construction (3.6 per cent), transportation and warehousing (3.9 per cent), health and social assistance (4.8 per cent) and accommodation and food services (4.8 per cent). But most are below the average pre-pandemic job vacancy rate of 2.8 per cent.
The bad news is that unemployment has been rising rapidly. The unemployment rate bottomed out at 4.8 per cent in July 2022, which was a welcome relief after the lockdowns and layoffs of the pandemic. But this July it was 6.4 per cent (with new jobs numbers coming out today). Just over a million people were looking for work in mid-summer 2022. Now almost 400,000 more are.
The dramatic recent increase in immigration obviously affects the labour force. If jobs don’t keep up and wages don’t fall to soak up excess labour supply, unemployment rises. Canada’s labour force has grown by 5.6 per cent — 1.167 million people — in just two years. But new jobs have grown only 3.9 per cent, absorbing 774,000 new workers — which means that about a third of the new labour force is jobless.
The slow growth in private-sector jobs is especially disturbing. They have absorbed just 506,000 members of the new labour force, growing only 3.3 per cent in two years. Squeezing out the private sector with higher wages from higher taxes, public-sector jobs have grown 6.6 per cent — exactly double the private rate. Double is actually a modest improvement, however. Since July 2014, federal, provincial and municipal public-sector jobs have grown 29.2 per cent, versus only 11.9 per cent for the private sector. That’s not far from three times as fast.
The story for young workers is worse. In two years, youth unemployment has risen 176,000 —from 269,000 to 445,000, a worrisome increase of 65 per cent. Youth are just 14 per cent of the labour force but now account for almost a third of newly unemployed people. The number of 15–24-year-olds who have jobs is up only 63,000 since mid-2022, leaving the rest of young workers, 110,000 of them, looking for work.
No wonder young people are abandoning the federal Liberal Party! They’re worried, not just about unaffordable housing, but also about grimmer economic prospects. And not only is it tougher to get a job but real average income among both young and older workers has barely budged since 2018. The combination of rising unemployment and suppressed incomes is leading to a brain drain as young people move to where job opportunities are better.
If I am right, we will soon be focusing on unemployment and emigration rather than inflation as policy priorities. But let’s remember why we got into this state in the first place.
Deficit-financed federal spending and lax monetary policy in 2020 and 2021 led to punishing inflation. Real wages dropped, pushing labour to bargain for higher wages as job vacancies rose. The strikes we’re seeing in the public sector and regulated industries are a continuation of that push. In 2021, taxes surged with inflation. So did corporate profits though higher interest rates have since flattened them out. And just as higher rates brought slower growth, unemployment was boosted by the sharp increase in immigration after 2022.
We need: economic and fiscal policy that encourages private-sector growth; governments that are prudent fiscally; and tax and regulatory reforms to boost investment and entrepreneurship. The solution to rising unemployment is not a bigger public sector. That’s basically what we’ve tried since the 2014 crash in commodity prices. And it clearly hasn’t worked.
Financial Post
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