CIBC WORLD MARKETS INC.

Economic Insights - June 18, 2014

3
Canadian Labour Market
The Roots of Budding Change
Benjamin Tal and Nick Exarhos
Chart 1
It Doesn't Look Good
The highly volatile monthly job creation figures and
an unemployment rate that sometimes masks more
than it reveals get all the attention. But the real tale of
the Canadian labour market is written far away from
the spotlights, closer to where the details reside. And
there, the emerging picture is of a job market that is
fundamentally changing. Canadian employment dances
increasingly to the tune of structural forces and less
to reversible cyclical dynamics. And its not only about
demographics. Job market mismatches, sticky long-term
unemployment, diverging bargaining power, rising entry
barriers and increased job tenure and job stability for
those who clear the bar, all suggest that monetary policy
aimed at the cyclical component of employment slack is
aiming at a shrinking target.
Productivity Catching Up
Its not news that the Canadian labour market hasnt
lived up to recent expectations. Job gains have trailed
the pace that economic growth would have suggested.
Indeed, since the beginning of 2013 the pace of monthly
employment growth has been on a declining trend, with
sizable drops within the past few months depressing the
six-month average signicantly (Chart 1).
To be sure, there are some factors that would explain why
hiring would lag behind what output would imply. Real
output per worker is still below its long-run trend (Chart
2, left), and a convergence there would imply a period
where the gains in the economy outpace commensurate
gains in employment. The acceleration in Canadian
productivity (Chart 2, right) is thus a by-product of that
catch-up.
Falling Participation RateIts All Demographics
Some believe that demographics can explain everything.
In the case of the declining labour market participation
rate in Canada, they are right. When referring to the
impact of the aging population on labour market activity
we should start using a present tenseit is already
happening.
Though participation rates in both Canada and the US
have fallen since the onset of the recession, the rate
of decline north of the border hasnt been as dramatic
(Chart 3, left). And the aforementioned demographic
effects have been the primary driver of that deterioration
in Canada, as opposed to the prevalence of cyclical factors
at work stateside. Looking at the difference between the
Source: Statistics Canada, CIBC
Chart 2
Below-Trend Real Output Per Worker (L)
Explains Productivity Pick-up (R)
Source: Statistics Canada, CIBC
Canadian Employment Growth
(m/m change)
0
5
10
15
20
25
30
35
12 13 14
000s, 6-mos moving avg
80
82
84
86
88
90
92
94
96
98
100
94 Q1 99 Q3 05 Q1 10 Q3
Real Output per Worker (000s)
Long-Run
Trend
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2006-09 2010-12 2013-
14Q1
Average Quarterly Change
in Productivity Index
(SAAR)
%
CIBC WORLD MARKETS INC. Economic Insights - June 18, 2014
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alternative measures of unemployment in the US and
Canada
1
suggests that Canada has not built up a notable
overhang of discouraged and under-employed individuals
(Chart 3, right).
Indeed, if we were to take the demographics prevalent
at the beginning of 2008 and hold them steady as age-
specic participation rates varied over time in Canada, we
would have seen the broad participation rate tick higher
(Chart 4, left). But because the employment share gains
of those aged over 55whose participation rate is much
lower than younger groupshave been at the expense
of prime-aged workers and youths (Chart 4, right), the
participation rate has steadily crept lower.
In fact, that drop in participation understates some deeper
deterioration, as a growing number of Canadians aged
55 and over still in the labour market are rapidly reducing
their level of job-market engagement. Since 2007 the
number of older self-employed individuals has risen much
faster than in any other age group, seeing their share in
total self-employment rise strongly (Chart 5).
Vacancies and Unemployment: Not Dancing to the
Same Tune
Wi th demographi cs sl owl y cl awi ng away at the
employable base of Canadians, another potential
structural factor may be chipping away at it further. The
Chart 4
An Aging Workforce (L) Primary Driver of
Participation Rate Slide (R)
Source: Statistics Canada, CIBC
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
15-24 25-54 55+
Change in Share of Working Age
Population Since 2008 (%)
66.0
66.5
67.0
67.5
68.0
68.5
08Q1 10Q1 12Q1 14Q1
Participation Rate
Actual
With '08
Demographics
Chart 6
Positively Correlated Vacancy and Unemployment
Rates Implies Some Labour Market Mismatch
Source: CIBC calculations based on Statistics Canada's tabulations
Chart 3
A Smaller Drop in Participation Rate (L) as Cyclical
Forces Less Important in Cdas Participation Slack (R)
Source: Statistics Canada, CIBC
60
61
62
63
64
65
66
67
68
Canada USA
Pre-2008 Avg Latest
Participation Rate
(%)
2.5
3.5
4.5
5.5
6.5
7.5
00 02 04 06 08 10 12 14
US
Canada
Broader Minus Narrower
Unemployment Definition
Residual (%)
Source: Statistics Canada, CIBC
Chart 5
Self-employment Rising Fast Among Workers
Aged 55+
Share of age 55+ in
Self-Employment
0.10
0.12
0.14
0.16
0.18
0.20
0.22
0.24
0.26
07 08 09 10 11 12 13 14
Growth in Self-Employment
(2007-2014)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
15-24 25-44 45-54 55+
Age
avg Jan-May
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
6.8 7.0 7.2 7.4 7.6 7.8
Unemployment rate (%)
V
a
c
a
n
c
y

r
a
t
e

(
%
)
Beveridge curve
March 2011-March 2014
CIBC WORLD MARKETS INC. Economic Insights - June 18, 2014
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Chart 8
Wage Gains Highest Among High-paying Industries
Source: Statistics Canada, CIBC
Chart 7
Inow into Unemployment Slowing (L), Long-term
Unemployment Remains Sticky (R)
2
3
4
5
6
7
00 02 04 06 08 10 12 14
%, 6-mo moving avg
Duration of <13 weeks as a
share of Total Labour Force
0
5
10
15
20
25
30
00 02 04 06 08 10 12 14
%, 6-mo moving avg
Duration of 27 weeks+ as a
share of Total Unemployment
Source: CIBC calculations based on Statistics Canada's tabulations
90
95
100
105
110
115
120
125
130
135
05 06 07 08 09 10 11 12 13 14
Low-paying industries
Mid-paying industries
High-paying industries
Wage index 2005=100
3-mos moving avg
High-paying Industries Led
the Way in Recent Years
abnormal relationship between recent vacancy rates
and unemployment suggests that large swaths of those
unemployed are not what employers are seeking. The
Beveridge Curve should be downward sloping, i.e. lower
levels of unemployment generally occur when there are
higher levels of job vacancies. That intuitive relationship
has failed to hold true in Canada since 2011, with higher
vacancies and higher unemployment positively correlated
(Chart 6)
2
.
A disconnect between the types of workers desired
and those that are available in the ranks of the
unemployed would explain how a growing number of
unlled vacancies could co-exist with a higher level of
unemployedand potentially unemployableindividuals.
In that context, the actual slack in the labour market
would in fact be lower than what is represented in the
headline unemployment rate
.
Diverging Bargaining Power
Traces of potentially unemployable workers can also
be seen when comparing inows into unemployment
(becoming unemployed) and the levels of the long-term
unemployed (staying unemployed). The share of those
unemployed for roughly three months or less has been
plumbing cycle lows recently, and is even close to all-time
troughs (Chart 7, left).
But the number of those who have been unemployed for
27 weeks and longer remained at elevated levels (Chart
7, right). Therefore, the sticky unemployment rate of the
past two years or so is largely due to stagnation in long-
term unemployment as opposed to an increase in the
number of newly unemployed.
And the wage mechanism reects this reality clearly.
Unlike past recoveries, the current one has seen stronger
pay increases amongst higher paid professions relative
to others (Chart 8). Those with higher levels of relevant
education and trainingwhich are unlikely to be those
stuck in unemploymenthave more bargaining power
than those who are engaged in less remunerative
professions.
Breaking on Through to the Other Side
In an environment where certain in-demand workers
are benefitting in ways others cannot, those who
Chart 9
Retention Rate Improving For Newly Employed
Source: CIBC calculations based on Statistics Canada's tabulations
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02
Low-paying industries
Mid-paying industries
High-paying industries
Wage index Dec 1992=100
3-mos moving avg
Not Much Difference During
the 1990s Jobless Recovery
and the Early 2000
40
45
50
55
60
65
77 81 85 89 93 97 01 05 09 13
Probability of Maintaining Employment Beyond
First Year
%
CIBC WORLD MARKETS INC. Economic Insights - June 18, 2014
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Source: Statistics Canada, CIBC
Chart 11
More Canadians Stay Employed For Longer
Share in Total Employment
15
20
25
30
88 90 92 94 96 98 00 02 04 06 08 10 12 14
40
42
44
46
48
50
52
<1 Year job tenure (L) >5 Years job tenure (R)
%
%
Chart 10
Retention Rate
Source: CIBC calculations based on Statistics Canada's tabulations
do nd employment are increasingly likely to remain
employed. Today there is a near-record high 60% chance
of remaining employed after completing a rst year on
the job
3
(Chart 9), with the retention rate naturally rising
with tenure (Chart 10). The share of Canadians with a
job tenure of more than ve years is at a record high, and
the share of those with less than one year in tenure is at
a record low (Chart 11). That marks increased stability in
the Canadian labour market.
This stable and boring job market is the complete
opposite of what was envisioned not too long ago. The
job market of the new economy was supposed to
permanently alter employer-employee relationships and
workers were seen as becoming increasingly disposable,
with the implication that job stability would tumble.
Rising survival rates between years of employment and
increased stability however, makes sense in a world
where there is a low supply of newly unemployedand
presumably still qualifiedindividuals. The situation
today keeps employers motivated to keep workers
they have. At the same time, a large overhang of long-
term unemployed reduces the motivation of lower skill
employees to branch out.
The reality for those who are looking for work are less
rosy: fewer seats being vacated affords those long-term
unemployed with fewer opportunities to nd a way
onto payrolls. Couple that with a skills mismatch and an
aging population shrinking the workforce, and landing
a job becomes harder today than it was previously. But
the current environment also suggests that once that
higher bar is cleared, a career featuring higher stability
lies ahead.
To be sure, the business cycle isnt dead and policy still
plays a role in rebalancing labour market activity. But the
job markets evolving structure makes the balancing act
much more challenging.
Note:
1) The residual is the difference between the U-6 and U-3 in the US, and the R8 and R3 measures in Canada. The U-3 is the headline
unemployment rate in the US. The BLS describes the U-6 as the unemployed included in the U-3, plus all persons marginally attached
to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally
attached to the labor force. The R3 is calculated by Statistics Canada in a similar methodology as that of the US headline rate, and the R8
includes under-employed and marginally attached workers that the U-6 also captures.
2) Granted the Beveridge curve presented here has very little history (monthly observations since 2011)but the ndings are consistent with
our previous research regarding that issue (see our In Focus titled The Haves and Have Nots of Canadas Labour Market dated December
3, 2012).
3) The retention rate is the probability of an individual with t years of experience remaining employed at year t+1. See Heisz, A. (1996),
Change in Job Tenure and Job Stability in Canada, Statistics Canada Catalogue no. 11F0019MPE.
0
20
40
60
80
100
from 1-2 from 2-3 from 3-4 from 4-5 Over 5
Years
Likelihood of Maintaining Employment
From One Year to Another
%