Assessment of Labour Market Health by the Bank of Canada – A balance from overheated levels and some signs of structural changes

Michel Cournoyer

May 2

This staff analytical note builds on Ens et al. (2021); Ens et al. (2022); and Ens, See and Luu (2023) to assess the health of the Canadian labour market. These earlier works established a more granular framework for assessing the labour market given its diverse and segmented nature. In this note we do three things:

We update the range of benchmarks in our dashboard of indicators, to ensure they remain relevant. We add an additional year of data, adjust for population aging and improve our filter estimates. We also estimate a series of Phillips curve equations using each indicator of the dashboard to understand how much inflationary pressure is coming from the labour market.
We do a deep dive to better understand structural changes in the Canadian labour market that could cloud assessments of labour slack. This includes a closer look at the muted recoveries in self-employment and low-wage jobs.
And finally, we discuss whether the labour market has moved into balance and how much it is contributing to inflation.
We find that the labour market has likely entered into balance from overheated levels, and we also see some signs of structural changes:

Overall, the labour market appears to have moved into balance. Notably, we see a large reduction in job openings and other demand indicators but no significant rise in layoffs. Moreover, Phillips curve estimates suggest that the labour market was not a large source of inflationary pressure in the first quarter of 2024.
Self-employment and low-wage employment appear to be permanently lower than in the past. For low-wage workers, this reflects lower levels of demand coming out of the COVID-19 pandemic, though impacted workers were largely able to reallocate to other sectors given the tight labour market following the reopening of the economy. Workers who are self-employed due to weak job prospects also make up a smaller share of the labour market than in the past, and this appears to be a long-term trend. As a result, weakness in indicators of self-employment and low-wage employment in the dashboard is less likely to represent labour market slack.

Low-wage occupations have not recovered after the economic shock of COVID-19

Another indicator that has deviated from the rest of the dashboard is employment in low-wage occupations.2 For most of the post-pandemic recovery, the employment rate in low-wage occupations has consistently been at the bottom of its benchmark range. This is in contrast to the path of employment in other occupations (as seen in Chart A-2, panel c, in the Appendix).

To understand what this observation conveys about labour market slack, we use Chart 4 to plot the percent change in employment in low-wage and other occupations relative to the same month in 2019. The blue line shows that overall employment has risen roughly 10% above its 2019 level because of increased population growth and tight labour markets. However, the aggregate measure masks a pattern of reallocation induced by the pandemic—during which low-wage occupations were hit the hardest.

After the significant decline in employment during the COVID-19 recession, employment in low-wage occupations recovered partially but has since remained below pre-pandemic levels. In contrast, employment in other occupations has outpaced average employment growth. This suggests that excess tightness in the labour market during the post-pandemic economic recovery may have enabled workers in low-wage occupations to reallocate to other occupations.