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Main takeaways

  • Many businesses are reporting difficulty filling vacancies, both skilled and unskilled jobs, despite Canada’s high level of unemployment.
  • We find that, compared to the situation in the US, there are not many workers in Canada who decided to leave the labour force and are waiting for better conditions to return. In Alberta, there is some evidence that some workers left the labour force and could come back.
  • Moreover, there is evidence that some workers who have lost their jobs in the sectors that have been the hardest-hit by the pandemic could be moving towards other industries, reducing the pool of available workers in client-facing industries.
  • Nevertheless, we find that weak immigration since the start of the pandemic could be an important contributor to the labour shortage in Canada. As such, we estimate that there are more than 200k workers missing in the labour force because of this. In Alberta, in addition to weak international immigration, the province’s labour market has also been affected by net migration out of the province since the pandemic, further reducing the labour force.
  • Our observations also suggest that the generosity of government programs is not the main reason behind the labour shortage in Canada.
  • As we have seen in the US, the labour shortage is likely to lead to higher wages as employers try to attract workers. However, with few workers waiting on the sideline, higher wages are likely to have a marginal impact at attracting workers and easing the labour shortage.

A labour shortage as the economy reopens is likely to restrict growth in the coming quarters. A shortage of skilled labour is already mentioned as an issue by many businesses. Many businesses scrambled to find specialists in technology to adapt to the economic reality of the pandemic with improved online presence and e-commerce, and the shift to working-from-home.

The situation south of our border gave us an early view of how intense the labour shortage could be in Canada. In the US, the labour shortage has particularly affected the lower wage and less skilled segment of the labour market. It has forced many employers to offer better incentives to attract workers. Part of the shortage in the US is the result of workers having left the labour force due to the pandemic and not yet comfortable or willing to come back to work. Is it the same in Canada?

How bad is the labour shortage in Canada?

There are already signs that the labour shortage is becoming more intense across the country as the economy reopens and businesses start to ramp up their hiring. The lack of available workers or the difficulty of hiring workers with the right skill set is being mentioned by businesses as a headwind on their growth.

About 23% of firms in the Bank of Canada Business Outlook survey are reporting labour shortages. This is roughly around the average of the past decade. However, when asked about the intensity of the labour shortage, the intensity has increased sharply in the latest survey and it is currently above its pre-pandemic level.

The latest survey from the Canadian Federation of Independent Businesses reports that 41.5% of firms say that a shortage of skilled labour is limiting their capacity to grow, on par with pre-pandemic. Where the labour shortage may have intensified is for unskilled workers. 30% of firms of are mentioning it as a factor restraining their growth, much higher than before the pandemic and an almost all-time high.

As the economy continues to recover and expand, and economic activity in the hardest-hit sectors continues to normalize, it is likely that the labour shortage will only become more intense.

Sources of the labour shortage

Lower participation rate

A way of looking at the labour shortage is whether the size of the labour force has shrunk with the pandemic. Many have argued that generous government programs have made staying out of the labour force more interesting for workers.

Looking at the participation rate for Canada, it is only 0.3 percentage points below where it was before the pandemic at 65.2%. The fact that the participation rate has almost recovered does not suggest that many workers are staying on the sideline. Nevertheless, roughly 60k could return to the labour force if the participation rate normalizes fully.

In Alberta, the participation rate has not recovered as much as in the rest of the country and is currently 1.2pp below its pre-pandemic level. This means that the labour force in the province is about 35k smaller than it would be if the participation rate has stayed the same.

 

 

This is a different situation from the US, where the participation rate is still 1.7pp lower than before the pandemic. This suggests that many workers decided to leave the labour force for various reasons: afraid of being infected, need to take care of family, illness, back to school, or simply unwilling to work.

Why workers left the labour force and are they coming back

Looking at the number of workers out of the labour force but wanting to work, we find that it is only about 60-70k bigger than pre-COVID in Canada (similar data is not published for Alberta). However, not all those workers are readily available to work. Some are out of the labour force because of illness, personal or familial responsibilities, or back to school. Once those workers are taken into account, less than 40k workers outside the labour force are immediately available.

Change in the composition of the labour force

The overall labour force has not shrunk, but we note that there have been some significant changes in the industrial composition. Looking at the changes in the labour force by industry, we make the following observations:

  1. The labour force in the food and accommodation sector has declined more than the number of job losses during the pandemic. This suggests that many workers losing their jobs are no longer looking for work in the sector. This shouldn’t be surprising. After three waves of COVID-related restrictions, it is not surprising that workers in the sector may be reconsidering their desire to work in the industry.
  2. The proportion of workers no longer attached to a specific industry has increased significantly. As such, the share of workers in an ‘unclassified industry’ has more than doubled. Translating that into unemployment by industry, more than 50% of the unemployed are part of the unclassified, compared to less than 40% before the pandemic. This suggests that many unemployed are considering or looking for work in multiple industries. This is a normal pattern that has been seen in previous recessions.
Weak immigration

With the international border being mostly closed since the pandemic, immigration to Canada has been the lowest in about two decades. As a result, the working-age population has grown by only about 0.8% y-o-y in recent months, half the 1.6% y-o-y growth rate seen on average in 2018 and 2019. Put differently, this means that the working-age population is 320k smaller than if immigration had stayed the same as during previous years.

 

 

If we assume that those new migrants would have the same participation as the broader population, at 65.2%, we estimated that the labour force is smaller by at least 200k workers because of this and will continue to grow at a slower pace as long as restrictions on new arrivals persist. Put differently, there are at least 200k workers missing to fill the current job postings. This could potentially create some acute labour shortages, especially in sectors employing newly arrived migrants.

In Alberta, in addition to the weak immigration, the province saw net migration out of the province since the start of the pandemic. It is estimated that about 7.5k people have left the province since the start of the pandemic, further reducing the pool of available workers.

Skill mismatch

The number of unemployed in Canada remains high. About 1.5 million workers are currently unemployed and a further 1.0 million are not working at full-capacity. However, because of a mismatch between the skills demanded for a job opening and the skillset of the unemployed, those job openings remain unfilled.

This situation is straightforward to understand when looking at skilled jobs. Since the pandemic, businesses have increased their hiring of workers with skills in e-commerce, web development and other IT-related areas significantly. However, many of the job losses have been in client-facing industries where workers do not possess those skills, hence cannot fill the current openings.

Even for low-skilled jobs, some mismatch could also be an issue. For example, a recently unemployed worker may not be willing to take a lower paid job. This is even more the case if this worker still benefits from a severance package and is in no hurry to find employment in a different field. Moreover, as mentioned previously, the pandemic may have rendered to sector less attractive to employment. As such, successive waves of restrictions and layoffs in client-facing sectors may be pushing the unemployed towards other sectors less potentially affected by the pandemic.

Impact on wages

As we have seen in the US, the labour shortage has led many employers to offer better wages and hiring bonuses to attract workers. However, the data in Canada suggests that we are not yet seeing a sharp increase in wages, as businesses compete for workers; one question is whether higher wages would solve the labour shortage issue.

As we have shown, the source of the labour shortage in the US and Canada differs. In the US, many workers are deciding to stay out of the labour market. By offering higher wages, those workers will likely come back into the labour force, easing the shortage.

The source of the labour shortage is different in Canada. The country does not have that many workers who have decided to leave the labour force. The lack of workers is more a consequence of the very weak immigration since the start of the pandemic. This means that only by restarting immigration will the supply of workers increase.

As a result, employers are likely to increase wages to attract workers, but higher wages will only marginally increase the pool of available workers. This means that higher wages will lead to more competition between businesses and industry to attract workers and not ease the labour shortage at a macro level.

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