a labour market feeling the weight of high rates

As we begin 2024, all eyes continue to be on the Bank of Canada and its highest-in-a-generation policy interest rate. In 2022 and into 2023 the Bank embarked on an unprecedented rate-tightening cycle—as evaluated by its pace, duration, and magnitude—in an effort to tame high inflation. In turn, these now-high interest rates haven’t just affected borrowing behaviour, they’ve permeated the labour market (as intended by the Bank).

At first blush the Canadian labour market appears to have been (and continue to be) resilient in the face of high interest rates. The unemployment rate, for example—which hit an all-time low of 4.9% in June 2022—has only increased to 5.8% in recent months. While higher than it was, it’s still quite low from a historical perspective. Meanwhile, total employment has continued to grow, though much of it can be attributed to the record population expansion Canada has experienced of late, driven by international migration. In fact, if one digs a little deeper into a few different labour market metrics, a clear picture emerges: a labour market that is, well, labouring.

If we compare the last seven months with the seven-month span that preceded it we see a labour market responding as you’d expect to a high interest rate environment. Why seven months? That’s how much time has passed since June 2023, when the Bank of Canada temporarily resumed its rate-hiking after a multi-month hiatus. 

During this period, the pace of job growth—while still positive—has slowed. At the same time, the number of unemployed persons has grown, the unemployment rate has risen, the number of people collecting regular employment insurance has gone up, and the number of vacant jobs has declined—all signs of a weakening labour market.

On the other hand, wage growth has increased modestly over the more recent seven months versus the prior seven, which the Bank of Canada has indicated it’s monitoring closely as it continues to develop its response to inflation. 

Also of interest is the job-changing rate (the proportion of employed persons who change jobs from one month to the next), which has been increasing of late after bottoming out in August 2023. Though it has been rising, it’s still lower than the pre-pandemic average—a possible sign that workers are feeling less confident about the state of the job market and prefer to retain the relative safety of their current position rather than jump to a new one.

With headline inflation sitting just outside the Bank’s target range of 1-3% (currently 3.1%), and a Canadian economy that has been slowing per a variety of measures, the discussion around interest rates has now shifted to when the first interest rate cut will take place. Be sure that if the labour market continues to labour, rate cuts won’t be far off.