Why Unemployment in Canada Is Worse than It Looks

Statistics Canada recently released its labour force data for November. This month’s data reflected an unusual combination of good news and bad news.

There was a strong gain in employment: 51,000 new jobs. That is a very respectable pace of job creation.

But counterintuitively, there was also a major jump in the unemployment rate. It increased from 6.5 per cent in October to 6.8 per cent in November. The number of officially unemployed increased to over 1.5 million — the highest since July 2021, back when the labour market was just coming out of COVID lockdowns.

How did we get both higher employment and higher unemployment at the same time? The answer lies on the supply side of the labour market.

While employment (the demand for labour) grew by 51,000 in November, the apparent supply of labour (measured by the “labour force” — people either working or actively seeking work) grew by 138,000. Even 51,000 new jobs couldn’t keep up, and the result was higher unemployment despite higher employment.

There were two reasons for the big jump in labour supply in November. Canada’s population is still growing very rapidly, despite recent federal government efforts to slow down inflows of both permanent immigration and temporary migrants (the latter of which surged dramatically after 2022, as employers turned to migrant labour to address so-called labour shortages).

The working-age population grew 80,000 in November. In the last year, it’s grown by 1.2 million (or 3.6 per cent), historically fast.

This was amplified in November by a rebound in the participation rate — that is, the proportion of the working-age population in the labour force (working, or actively seeking it).

The participation rate has been slowly sliding for the last two years. This has been a predictable consequence of higher interest rates and the resulting economic slowdown: people are less likely to join the labour market and search for work when fewer vacancies are available. That decline in participation reverses improvements that occurred after the COVID lockdowns — when, for a short while, help-wanted signs were everywhere, leading more potential workers to throw their hats in the ring.

However, that two-year downward slide in participation was partially reversed in November: participation rebounded by 0.3 percentage points. It’s too early to know whether that rebound will be sustained or was just monthly “noise” (monthly labour force statistics bounce around so much that one-month changes must be interpreted cautiously). Nevertheless, the combination of growing population and higher participation gave a double-barrelled boost to labour supply.

A light shone on hidden non-employment

November’s unusual combination of strong job creation alongside rising unemployment casts a spotlight on deeper issues raised by population growth and labour force participation in Canada.

Declining participation in the last two years has meant that the slackening of Canada’s labour market under the Bank of Canada’s rate hikes has been significantly worse than the unemployment rate suggests. In effect, due to lower participation, much of the growth in non-employment among working-age Canadians was hidden from the official unemployment statistics.

Despite improvement in 2021 and 2022, participation had not quite regained its pre-pandemic rate (2019 participation averaged over 66 per cent) when the Bank of Canada took away the punch bowl. If that 2019 participation rate still prevailed today, then the current unemployment rate would be 8.2 per cent (not 6.8 per cent). That’s very high, more typical of a recession — even though Canada (narrowly) avoided a technical recession during the recent disinflation.

This is more evidence that the Bank of Canada badly overshot in hiking interest rates to reduce inflation — which wasn’t caused by labour market pressures, anyway (it was caused by broken supply chains, a global energy price shock and record-high corporate profit margins).

The selling of a false labour shortage

Now, after two years of painful stagnation, Canada’s economy and labour market are showing signs of life — and further cuts in interest rates (another likely next week) will help. But for many Canadians it still feels like a recession, even though we technically avoided one. And that’s because true unemployment is significantly worse than official statistics indicate.

Moreover, beyond the problem of suppressed labour force participation, there are other pools of hidden unemployment in Canada. Many part-time workers want and need full-time work, but can’t find it. And many others would work if decent jobs were accessible to them (including people with disabilities, people who balance work and care responsibilities, and others). Only in a very tight labour market are employers pressed to design flexible options so these people can work.

This perspective provides another painful reminder that when employers cry about so-called labour shortages (as they did loudly in 2022, pushing the Bank of Canada to raise rates), this is not proof of a genuine labour supply constraint. Rather, their main motive is pressuring government to ensure supplies of disciplined, low-cost, just-in-time labour.

The dominance of the “labour shortage” discourse led to multiple policy mistakes, including unnecessary monetary tightening and the abuse of migrant labour programs.

But in reality, Canada was never “running out” of workers. And today, 1.5 million officially unemployed Canadians are just part of the true unemployment that’s been deliberately engineered to keep employers happy.