Bank of Canada governor Tiff Macklem said that unemployment needs to rise in order to slow down inflation, although elevated levels of job vacancies could soften the blow.
In a speech in Toronto hosted by the Public policy forum, Mr. Macklem said that Canada’s labour market is overheating. This is feeding through into inflation, as companies bid up wages to compete for employees.
“We need to rebalance the labour market,” Mr. Macklem said. “This will be a difficult adjustment. We want to do this in the best way possible for Canadian workers and businesses.”
Mr. Macklem’s comments come on the heels of a blowout jobs report last Friday. Employment jumped by 108,000 in October, recouping all of the jobs lost during the summer slowdown. Average hourly wages were up 5.6 per cent that month compared to the previous year, while the rate of unemployment remained steady at 5.2 per cent as work force participation rose.
The strength of the labour market is a challenge for the central bank. Mr. Macklem and his team are actively trying to slow down Canada’s economy – something they see as necessary to restore price stability.
“The unemployment rate in June hit a record low - and while that seems like a good thing, it is not sustainable,” Mr. Macklem said. “The tightness in the labour market is a symptom of the general imbalance between demand and supply that is fuelling inflation and hurting all Canadians.”
The central bank has raised interest rates six times since March, increasing its benchmark rate to 3.75 per cent from 0.25 per cent at the start of the year. Mr. Macklem has said that rates still need to rise further, and financial markets expect further increases in December and January.
The Bank of Canada is projecting near-zero growth in the coming quarters as higher rates constrain spending and investment.
This will lead to higher levels of unemployment, Mr. Macklem said. At the same time, he suggested that the elevated level of job vacancies could provide something of a cushion for falling demand for labour. The hope is that companies take down help-wanted signs without also laying off too many workers.
“Generally speaking, when job vacancies are high, as they are now, a decline in vacancies does not lead to as big an increase in unemployment as it does when job vacancies are low to begin with,” Mr. Macklem said.
He said that new Bank of Canada analysis “suggests that the unemployment rate will rise somewhat if the job vacancy rate returns to more normal levels. But it would not be high unemployment by historical standards.”
Tight labour markets are a product of both demand and supply. Canada’s labour supply has been squeezed by a combination of an aging work force that is retiring, and a fall in immigration during the COVID-19 pandemic.
Mr. Macklem said that labour supply could improve as immigration normalizes. Immigration is already back to prepandemic levels, and the federal government said last week that it would boost immigration levels in the coming years. Increasing supply, however, is “not a substitute for using monetary policy to moderate demand and bring demand and supply into balance,” Mr. Macklem said.
Inflation trended down in recent months, with consumer price index inflation falling to 6.9 per cent in September from a four-decade high of 8.1 per cent in June. Statistics Canada will publish the October CPI numbers next Wednesday.
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