Workers, jobs, growth and inflation—Today and tomorrow

Introduction

Good afternoon. It’s a pleasure to be here. Today is, of course, Saint-Jean-Baptiste Day, celebrated by many franco-Manitobans. Bonne Saint-Jean à toutes et à tous!

When I started as governor on June 3, 2020, the economy was in crisis. It was early in the pandemic and Canada’s unemployment rate was 14%—the highest on record. Inflation was well below the 2% target—actually, it was slightly negative. The immediate priority was to avoid deflation and get the economy back on its feet.

But since 2022, we’ve been fighting a new battle—high inflation. When the economy reopened, the combination of gummed up global supply chains, a strong surge in demand and Russia’s unprovoked invasion of Ukraine sent inflation sharply higher. It peaked at just over 8% in June 2022. For more than two years, our focus has been getting inflation back down.

We’ve come a long way. Monetary policy has worked, and it is continuing to work. Since January, inflation has been below 3%, and our measures of underlying inflation have eased steadily. This has increased our confidence that inflation will continue to move closer to the 2% target this year. And earlier this month, we lowered our policy interest rate for the first time in four years.

Low, stable and predictable inflation allows Canadians to spend and invest with confidence. It lowers uncertainty and encourages long-term investment. And it contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living. That’s why price stability is our number one priority.

A key ingredient for price stability is a healthy labour market—one in which Canadians have the jobs they want, employers have the workers they need, and real wages grow in line with productivity. Economists call this maximum sustainable employment—the highest level of employment the economy can sustain without triggering inflationary pressures.

The health of the Canadian labour market is what I’ll talk about today. In the 2021 renewal of our monetary policy framework, the federal government and the Bank of Canada agreed price stability is our primary objective. We also agreed monetary policy should continue to support maximum sustainable employment. Since then, we’ve done extensive work to bolster our analysis of the labour market. We’ve published a new dashboard of labour market indicators and updated our benchmarks for these indicators each year.

So where are we now? And what’s ahead?

With higher interest rates, spending has cooled, and businesses have scaled back their hiring plans. Strong immigration has also helped the supply of workers catch up with demand, bringing the labour market into better balance. But it’s now getting harder to find a new job. That’s particularly affecting younger workers and newcomers to Canada. And it suggests that the economy now has room to grow without building new inflationary pressures.

If we look at the labour market with a longer-term lens, we see that Canada’s growing, inclusive and well-educated labour force has been a key advantage for our economy. It’s been our primary source of economic growth for the past 25 years, and sustaining this advantage is critical to achieving strong non-inflationary growth going forward.

That’s my speech in a nutshell. If that’s all you need, you can start checking your phone now. But if you’ll stick with me for another 15 minutes, I’ll take a closer look at the health of the Canadian labour market in both the short and the long term.

The labour market cycle

When the pandemic hit and the economy shuttered, three million Canadians were laid off and another two million saw their hours of work cut back. Fortunately, the combination of new vaccines and exceptional fiscal and monetary policy fuelled a rapid labour market recovery—indeed, it was the fastest recovery on record.

But as the economy fully reopened, the labour market moved quickly from recovering to overheated. Demand rebounded rapidly as people tried to catch up on what they had missed through the lockdowns. Businesses scrambled to find workers, and the unemployment rate fell to 4.8% by July 2022—a level not seen since the 1970s. Job vacancies rose sharply, reaching one million vacant positions. Wage growth started to climb as the worker shortage intensified and inflation peaked above 8%. The economy was clearly overheated.

Beginning in March 2022, the Bank of Canada raised interest rates forcefully to cool demand and relieve price pressures. As higher interest rates worked their way through the economy and restrained spending, reports of job shortages began to decline. Job vacancies came down, returning close to their historical average, and inflation eased (Chart 1).