Canada’s labour market is already limping, and lower oil prices could further dampen income growth and employment opportunities, the Bank of Canada says.
“We have an oil price shock which will reduce the income flowing into Canada, and lead probably to some increase in unemployment over all,” Governor Stephen Poloz told reporters Wednesday just after the central bank unexpectedly cut rates.
The Bank of Canada bases its interest rate decisions on inflation targets. But it’s keeping an increasingly public eye on the health of the country’s labour market, too. Its monetary policy report observes that “material slack” remains in the economy, particularly in the jobs market, which is currently softer than the headline unemployment rate suggests.
It is hoping to cushion the sting of plummeting oil prices. Back in 2002, when oil prices were climbing and terms of trade improving, incomes of all Canadians benefited, senior deputy governor Carolyn Wilkins said. Now, the plunge in oil “reverses some of those gains,” she said.
In the near term, lower oil prices are expected to give some relief to consumers. But the bank now sees a slowing in consumption growth, as negative terms of trade from lower oil prices “leads to higher unemployment and restrains income growth and wealth.”
That restrained income growth in turn could drive household debt levels – already at a record – still higher, the bank cautioned.
The central bank also sees lingering weakness in the labour market. Its own measure of labour market performance – introduced last year – suggests “both more labour market slack and less improvement in labour market conditions than indicated by the unemployment rate,” which sits at 6.6 per cent.
Some of areas of weakness have been cited before: Long-term unemployment is still close to its post-crisis peak, average hours worked remain low, and the share of involuntary part-time workers is still elevated. Wage gains, meantime, remain only “moderate,” the bank said.
But the central bank is also troubled by how many Canadians are sitting on the sidelines of the labour market. The country’s participation rate has ebbed to 65.9 per cent, a 13-year low. Some of that is a result of an aging population – but not all. Rather, some workers may be giving up on the hope of finding permanent employment.
“In another sign of ongoing labour market challenges, the participation rate is low relative to what would be suggested by purely demographic forces,” the bank said.
Most concerning is the drop in the participation rate among core-aged workers, especially in Ontario. “These people are at the prime of their working lives and they are the largest component of the labour force, so even a small drop has implications,” weighing on domestic demand and suggesting possible growing pressures on social assistance, said Tyler Meredith, research director at the Institute for Research on Public Policy.
Canada is really a tale of two economies, central bank officials stressed: the long-booming energy sector, which is showing clear signs of slowing, and the non-energy export sector, which is looking brighter thanks to a stronger U.S. economy and a weaker Canadian dollar.
It remains unclear, though, whether lost jobs in the oil patch – Suncor Energy Inc., for example, announced 1,000 cuts this month – will be counterbalanced by new positions that pay equivalent wages in Central Canada, Mr. Meredith said. “These are not necessarily the same jobs, and not at same wage rates.”
There are some encouraging signs for workers. Inflation is expected to cool later this year, which could mean some real wage gains. And the central bank expects the economy should start to gradually strengthen by the second half of this year as U.S. growth gathers steam.Report Typo/Error