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The percentage of Canadian adults participating in the labour force last month was 65.7 per cent, identical to what it was in October, 2018, and July, 2016, after accounting for usual seasonal variations.Frank Gunn/The Canadian Press

Mikal Skuterud is a professor of economics at the University of Waterloo and the director of the Canadian Labour Economics Forum.

If your inclination in hearing about Canada’s labour shortage crisis is to ask, “Where did all the workers go?” you have the wrong economic model in mind.

Despite our aging population, the percentage of Canadian adults participating in the labour force was 65.7 per cent last month, identical to what it was in October, 2018, and July, 2016, after accounting for usual seasonal variations.

In terms of absolute numbers, Canada’s labour force now stands at 20.8 million workers, the largest it has ever been.

Rather than not enough workers, the issue is that the prices of the goods and services that workers produce have increased faster than their wages, motivating businesses to hire more workers and sell more.

Canada’s current tight labour markets overwhelmingly reflect increases in the demand for workers, not a decline in their numbers. And the solution is not to satiate that demand with cheap labour, which undermines labour productivity and average economic living standards in the population.

Why do so many people interpret current labour shortages as “not enough workers”? It is because in their minds the jobs that need to be done in our economy are fixed and the job of policy makers is to make sure there are enough workers to fill all the slots, so the economy does not fall apart.

But employers’ demands for workers are constantly fluctuating and evolving in response to factors within the economy, including relative prices, interest rates, technological advances and consumers’ preferences and incomes.

In 1921, one-third of Canada’s workers were employed in agriculture. After more than 100 years of innovation in farming equipment, less than 2 per cent are.

Very few jobs, if any, are truly essential.

Once we recognize that the jobs employers seek to fill in the economy are fluid, it all becomes clear.

Throughout this pandemic era, I have been tracking Canadian labour-market tightness, measured as the number of job vacancies per available job seeker. After hovering between 0.2 and 0.6 in the 2015-20 period, the ratio surged in January, 2021, and peaked at 1.1 job vacancies for every job seeker in June, 2022.

It is not a coincidence that this increase in labour-market tightness lines up precisely with movements in the relative prices of the goods and services that businesses sell and the wages that workers are paid.

Canada’s headline inflation rate – Statistics Canada’s measure of the annual change in consumer prices – stood at 1 per cent in January, 2021, but increased rapidly, peaking at 7.9 per cent in June, 2022.

After accounting for changes in the mix of jobs, I estimate that workers’ wages were growing at an annual rate of 1.7 per cent in January, 2021, which sluggishly increased to 3.7 per cent by June, 2022, far behind the pace of increases in consumer prices.

In other words, workers’ wages have not kept pace with the prices of the goods and services they produce and consume.

Workers aren’t disappearing; what’s happened is employers’ profit incentives to hire more workers have increased dramatically.

And as the gap between the growth in consumer prices and workers’ wages diminished after June, 2022, so did the hiring appetite of Canadian businesses. With one exception, the number of job vacancies declined in every month between May and November, 2022, resulting in a 21-per-cent reduction in total job vacancies in six months.

In November, 2022, the most recent data we have, there were 0.8 job vacancies for every job seeker, down from the June peak of 1.1.

No doubt, Canadian labour-market tightness remains elevated, making life difficult for some businesses. Competing for scarce workers with other businesses and retaining the ones you have requires improving wages and working conditions, which eats into profit margins. And where competition is especially fierce, it can pose existential risks.

But business failures are a healthy feature of a well-functioning economy. Starting a new business is necessarily risky. It ensures scarce capital is invested where its expected returns are highest and that the businesses that survive are the ones that utilize their workers most efficiently by, for example, investing in new technologies to maximize employee productivity.

These competitive pressures are not a good thing for businesses struggling to turn a profit, and those businesses will plead for government support.

But not coddling the business lobby by, for example, expanding wage-subsidy programs or easing access to low-skilled temporary foreign workers, including foreign students, is good for worker productivity, workers’ wages and average economic living standards.

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