Canada's labour market shifts challenge monetary policy
Bank of Canada External Deputy Governor Nicolas Vincent discussed the Canadian labour market, highlighting the distinction between cyclical fluctuations and structural transformations. He emphasized how these shifts influence the conduct of monetary policy.
Navigating the current slowdown
Canada's labour market has recently slowed, showing mild excess supply.
The economy added only about 6,000 jobs per month since early 2025, a significant drop from almost 34,000 monthly jobs in 2024.
This slowdown, partly due to lower growth in the working-age population and US tariffs, has seen the employment rate fall by 0.6 percentage points since January 2025.
While the unemployment rate remains in the 6.5-7% range, the Bank of Canada (BoC) emphasizes the critical need to distinguish between short-term cyclical fluctuations and more permanent structural transformations.
This distinction is vital for effective monetary policy, as the BoC's tools are more limited in addressing deeper structural changes.
Analyzing granular data, including microdata and surveys, is essential to understand these nuances.
The 'low hire-low fire' dilemma
A key trend in the Canadian labour market is low turnover, with stable layoff rates despite rising unemployment.
Since 2022, job-finding for unemployed workers is at a 30-year low, creating a 'low hire-low fire' dynamic.
This reduced dynamism hinders worker reallocation and slows adaptation to economic shocks, potentially undermining productivity and competitiveness.
Cyclical factors, such as past interest rate hikes and geopolitical uncertainty, contribute to this inertia.
Structurally, population aging also plays a role, as businesses retain experienced workers and hire fewer new entrants, leading to diverging employment rates across age groups.
A widening skills chasm
The historically high long-term unemployment rate signals a critical risk of hysteresis and skill erosion.
This persistent challenge, driven by a growing mismatch between worker skills and employer demands, limits the economy's growth potential.
The enduring nature of low turnover and high long-term unemployment points to structural issues beyond the immediate reach of monetary policy.