By DAVID PARKINSON
Monday, July 15, 2019
At the Bank of Canada's quarterly economic-update press conference last week, a reporter asked the bank's second-in-command, senior deputy Governor Carolyn Wilkins, if the central bank was worried about Canada's job market.
It might seem an odd thing to worry about. Employment rose by nearly a quarter-million jobs in the first six months of the year. Jobs have increased in eight of the past 10 months.
Unemployment is hovering near fourdecade lows.
But the issue for the questioner wasn't whether the job market is strong - it undeniably is - but why it is so strong. With this kind of job growth, you'd expect to see an economy that is booming; it's not.
Over the last quarter of 2018 and the first quarter of this year, the country added 280,000 jobs while the economy barely grew at all.
If there isn't economic growth to support all that hiring, is the job market floating on hot air - and, maybe, doomed for a fall?
"The labour market is very healthy," Ms. Wilkins responded. "What companies have on their minds is that they need to hire to be ready for the growth they tell us they expect to see. I think that, from a business-planning point of view, you can imagine that's part of what's going on, and how you would square the circle."
Perhaps. Employment isn't historically much of a leading indicator of future economic activity, although it has been known on occasion to anticipate an economic upswing. But while the economy did bounce back in the just-ended second quarter (the Bank of Canada estimates that gross domestic product grew at a 2.3per-cent annualized pace), the central bank predicted last week that growth will moderate again in the second half of the year, to the 1.5-per-cent range. For the full year, the bank forecasts growth of just 1.3 per cent - which would make it the second-slowest year since the Great Recession.
That hardly looks like a year that can sustain this flurry of hiring.
Unless employers are foreseeing an economic surge that has eluded the predictive powers of the Bank of Canada, the job market may soon get pushed back to reality.
Unless, of course, there is some other explanation for this unusual disconnect between employment growth and economic growth. And it is unusual. Jobs and economic growth isn't a one-way relationship, it's more of a virtuous circle. Not only does a stronger economy fuel job creation, but that job growth in turn feeds economic activity, as more workers produce more goods and services, and consumers have more wages to spend.
You expect the two of them to feed off each other, to grow together. When they don't, you have to wonder if something else is going on.
One factor that may be at play is the elevated sense of risk and uncertainty that the business community continues to confront, most notably on the trade front. With businesses uncertain about the future reliability of their key markets, many companies continue to resist making capital investments to expand their capacity. Given that many industries are operating near full capacity, it would appear that many businesses have opted to invest in more labour to meet their capacity needs, viewing it as a lower-risk option than investing more heavily in capital.
That not only helps to explain the elevated levels of hiring, but the relatively modest corresponding economic boost - there's a shortage of capital investment contributing to the equation.
Labour shortages may also be behind businesses' appetite for hiring. Historically, low unemployment has meant slim pickings for workers in many industries, especially higher-skilled workers. It may be that businesses are securing skilled workers before they actually need them, rather than running the risk that those skill sets simply won't be available when their needs become pressing. But if you're hiring workers for whom you don't have enough productive work, they aren't going to add a lot to output.
Canadian Imperial Bank of Commerce economist Benjamin Tal recently raised an intriguing theory about the growth versus jobs disconnect. In a research report this month, Mr. Tal noted that even as Canada's employment has surged this year, the "employment quality" has declined. He said the composition of job creation over the past 12 months has tilted toward lowpaying sectors of the labour market, while higher-paying industries have actually hired very little.
The thin labour supply might be a key reason for this - the pool of workers still available is tilted toward the lower-skilled, lower-paid end. Nevertheless, the lower-end jobs that are dominating the hiring are not the kind of value-adding, productivity-enhancing positions that contribute strongly to economic growth - particularly at the current relatively late stages of the economic expansion.
"It appears those new jobs do not add much to the nation's overall productive capacity," Mr.Tal wrote. "We need relatively more workers to generate the same increase in income."