A recent commentary published by Moody's Analytics on the Canadian economy suggests that stagflation -- the combination of low or negative economic growth with high inflation -- is a looming possibility in Atlantic Canada. The report’s author believes higher inflation in the region will be driven by a lack of supply in the labour market rather than in upward demand for goods and housing.
In 2011, we see signs pointing towards this trend. In New Brunswick, real gross domestic product (GDP) is thought to have risen by only about 0.5 per cent while the inflation rate rose from less than 2 per cent in 2010 to 3.3 per cent in 2011.
As is increasingly the case, it is important to carve out Newfoundland and Labrador from the rest of Atlantic Canada. That province may also face upward pressure on prices in the coming years but it will not be coupled with weak economic growth.
Mark Hopkins, the senior Canadian economist for Moody's in the U.S., concludes that “persistently high unemployment has also encouraged outmigration and discouraged investment, limiting long‐term growth prospects. As a result, the Atlantic provinces face an increasing threat of stagflation, with rates of unemployment and inflation among the highest in the country."
How is it that Atlantic Canada can have “persistently high unemployment” and a lack of supply in the labour market at the same time?
The Moody’s commentary highlights a chronic problem for the region saying “[w]rkers are leaving the Maritimes for jobs out west, but that is contributing to a shortage of the supply for the skilled jobs that do exist in the region, which raises inflation.”
As well as shortages in skilled workers, I would go further and argue an even larger problem is the growing labour market shortages in semi- and low-skilled jobs.
As an example, Tim Horton’s has been recruiting for bilingual workers in North Africa for its Moncton stores because of the difficulty of finding local people to work. There are retail and food services establishments all over the Maritimes that are beginning to use immigrants to address work force shortages.
I am a big fan of immigration but I believe it is just as important to focus on addressing the structural challenges in the existing labour market.
The example of Britain provides a warning for Canada. In a Bagehot column this week, the Economist magazine summed up the position of the current Cameron Conservative government which believes Tony Blair and Gordon Cameron’s Labour party is guilty of “lazily allowing foreigners to take millions of jobs during the boom years rather than improving the employability of native workers”.
We could see this happen in Atlantic Canada as well. Instead of attempting structural reform to the Employment Insurance (EI) program, it may be easier and more convenient to plug labour market holes with immigrant workers. Instead of addressing significant skills deficiencies among a significant segment of the population, some would suggest we should just bring in immigrants who already have the needed skills.
This is short sighted. Having a large part of the population left behind chronically dependent on EI, social assistance or other transfer payments as a primary source of income to provide for their families is neither a good outcome for the individuals or for society as a whole.
Government, industry and community leaders need to address this issue now before it becomes a much more significant problem.
David Campbell is an economic development consultant and columnist based in Moncton. He also authors a daily blog on economic issues in Atlantic Canada which can be found at www.davidwcampbell.com.