As the Canadian economy slips toward something that’s going to look an awful lot like stagflation, it’s hard to avoid comparisons to the 1970s, when that term earned its infamy. But Stephen Poloz wants us to remember that there is one key difference: We’re a lot older now.
The former Bank of Canada governor isn’t noting the nearly five decades of time passing, nor talking about some sense of older-and-wiser. He’s referring to demographics.
When the economic doldrums hit nearly a half-century ago, the massive and economically influential baby boomer population was flooding into the labour market. Today, those same people are retiring in droves. That reversal creates a very different looking stagflation – and a mirror image of the pitfalls for economic policy makers.
“The influx of boomers into the work force in the 1970s pushed up unemployment, which helped convince policy makers to keep stimulating the economy. The result was the Great Inflation,” Mr. Poloz said in a post on LinkedIn this week. “Today those very same boomers are retiring, pushing down unemployment and distorting labour market signals once again.”
Mr. Poloz made that observation the same day that Statistics Canada reported that the Canadian economy grew at a solid 2.9-per-cent annualized rate in the third quarter. But beneath that seemingly healthy number – bolstered by commodity exports and rising inventories – domestic demand stagnated, slipping by 0.6 per cent annualized.
Those numbers support the widely held expectation that we are headed toward slow to no growth – and perhaps an outright contraction – over the next few quarters. And we are certainly going to still have high inflation when we get there. Those are the key ingredients of stagflation.
But what’s still missing – and what makes this look unlike any typical downturn – is a labour slump. Despite the domestic demand weakness, unemployment is near historic lows. Job vacancy rates are still extremely high. By all accounts, labour shortages remain acute.
The Bank of Canada, which has been aggressively raising interest rates to cool demand in order to tame inflation pressures, has said that a “rebalancing” of the labour market is key to achieving its goal. But at least some of that labour shortage, Mr. Poloz argues, isn’t because of cyclical economic forces against which the central bank is leaning, but to longer-term demographic forces as the Canada’s supply of workers continues to age.
“Some of what we’re seeing [in labour shortages] – and I can’t really say how much – is not cyclical,” he said in a telephone interview Wednesday. “Some of it is structural. And it can be misleading.”
While it is, indeed, difficult to parse what share of the current labour tightness has been fuelled by the demographics, we certainly have hard numbers to show that the boomer exodus is a substantial force in the labour market.
Statistics Canada data show that Canadians are retiring at a rate of about 300,000 a year, up roughly 50 per cent from a decade ago. And the COVID-19 pandemic has, if anything, accelerated the retirement pace. The population of Canadians over the age of 55 has grown by more than 600,000 since the COVID-19 pandemic began. The number of those people in the labour force – that is, either working or seeking work – is essentially unchanged in that time. The labour participation rate for this age group was 34.6 per cent in October, down from more than 36 per cent before the pandemic.
It all adds up to a departure of a lot of potential workers. And it’s far from over: The tail end of the boomer generation is still in its late 50s. This substantial drag on labour supply growth will be with us for many more years.
Unlike the shorter-term cyclical pressures from labour shortages – typically, rising wages in an environment of booming consumer demand, which gets passed along to customers in the form or higher prices – Mr. Poloz isn’t convinced that the longer-term structural labour strains are necessarily inflationary. He believes they could prove disinflationary, as businesses respond to tight labour supplies by investing in technology and equipment to improve productivity. The resulting increase in the economy’s overall productive capacity would, thus, expand the supply side of the equation and allow more demand growth without fuelling inflation.
The implication for central bankers is that as the current heightened inflation situation eases and the severe labour shortages moderate, they will need to look beyond labour indicators for their next cues on inflation. Trying to, say, guide unemployment and vacancies back toward historic norms, in the face of the demographic shifts, posed the risk of steering rate policy astray.
“The labour market certainly shouldn’t be the only thing you look at,” he cautioned. He suggested that measures of business investment and potential output growth will be essential to the analysis for central bankers as we emerge from the current situation.
Mr. Poloz insists that he’s not being critical of the current brain trust at the Bank of Canada – that’s something that past central bank bosses, especially recent ones, carefully avoid, it’s just bad form.
But he said the public should understand that a lot more will have to go into the modelling for monetary policy in the next couple of years than simply watching the unemployment rate or job vacancy numbers.
“It’s just a more complicated situation than what I’m seeing reported or talked about.”