Labour shortages likely will be around for years to come
Where are all the workers? Before March 2020 we had no shortages of airport baggage-handlers, restaurant servers, emergency-room nurses or passport custom agents. Now there are endless stories of not enough workers in almost all sectors of the economy.
As Statistics Canada reported June 24th, about one million jobs were vacant in April, 130,000 more than last December. Shortages are running at 5.8 per cent of payroll employees (excluding the self-employed). They are especially acute in accommodation and food services (at 11.9 per cent of employment in that sector), arts and entertainment (8.2 per cent), administrative support, waste management and remediation services (7.5 per cent) and the catch-all “other” services (7.5 per cent). Only in utilities and public administration are vacancy rates relatively low (at 1.8 and 2.9 per cent, respectively).
In February 2020, just before the pandemic hit, 1.16 million Canadians were unemployed. In May 2022, despite the huge number of jobs available, unemployment was at 1.06 million, lower by only 100,000. Why aren’t more people working?
Economic theory would predict that, with demand for goods and services rising, as it has been, employers seeking more profits would raise wages to attract new employees. And that has been happening — to an extent. Weekly compensation, overtime included, rose 4.0 per cent year-over-year through April. But that trailed our sky-high 7.7 per cent inflation rate. Nominal wages are rising but with prices rising even faster real wages are down. Employers have been reluctant to raise wages further for fear of becoming uncompetitive, especially with their other costs rising because of inflation.
So why are there so many job vacancies and why isn’t unemployment falling more quickly? After a close look at the numbers, I come down to three critical factors: population aging, mismatching of jobs and skills, and government spending crowding out the private sector.
The demographic impact on labour supply is well known. What’s less understood is just how much it has affected the labour force in the 26 months since the start of the pandemic. Canada’s working-age population (those 15 years and older) rose by 757,000 people from February 2020 through May of this year. But only a little over half of those people have gone into the labour force, which has risen by just 397,000.
The lion’s share of these new entrants — 377,000 — has been in the middle-age category (25 to 54 years of age). There has been virtually no increase in youth (those 15 to 24) entering the labour force, even though 24,000 more are now working. Among those 55 years of age and older, 53,000 more are working today than in February 2020. But almost 518,000, many highly skilled, have left the work force. In brief, few young people are coming into the labour force while more than half a million older folk have left.
Beyond the grinding of demography, public policies encourage people to retire even though many are quite healthy and could continue working. Old age security, CPP and other senior benefits and tax preferences enable people to leave the work force at 65 years of age (or sooner) despite their life expectancy of another two decades. The Harper government did begin to move eligibility to 67 years but in one of its first acts after being elected the Trudeau canceled that change — mistakenly, in my view. High personal taxes also encourage early retirement, and both federal and provincial governments have hiked rates since 2014.
Mismatching in labour markets is another well-known explanation for labour shortages. Employers whose workers left during the pandemic are having trouble getting them back or finding replacements. Many workers have upgraded their skills and shifted to higher-paying sectors. That’s all well and good but it does not explain why over one million people remain unemployed. It’s possible their skills are no longer needed but in fact many shortages are for less-skilled jobs. Many workers still have COVID health concerns but that’s less a factor in 2022 except amongst older workers.
A better explanation has been the surge in recent years in federal and provincial benefits that people not to work. With the greater availability and/or generosity of extended employment insurance benefits, child benefits, provincial social assistance, GST credits and carbon tax rebates, there may be little financial gain in taking on full- or part-time work paying a modest income. High clawback rates on income-tested programs — reaching 60 to 70 per cent at just $30,000 to $40,000 in income — are also a significant barrier to work.
A third and less known factor is the public sector crowding out private-sector employment. Federal, provincial and municipal governments employ only a fifth of the workforce but account for 84 per cent of employment growth since February 2020, with 418,000 new public employees. This has reduced the number of workers available to the private sector. High government spending also crowds out private-sector investment by pushing up interest rates and eventually business taxes to cover deficits. This can weaken business incentives to adopt technologies to improve worker productivity.
Labour shortages likely will be around for years to come. Government policy should focus on getting the million unemployed back to work. But it will require a U-turn from today’s redistribution-focused public policies.
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