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At the end of the strongest year for Canadian job creation in at least a decade, the head of the Bank of Canada has found a couple of things in the job market to worry about. One of them may, in the longer term, be a blessing in disguise. The other may prove to be a key issue for the labour market, and the broader economy, in the next year.

In a speech in Toronto last week, BoC Governor Stephen Poloz listed "the tough job market for young people" among the three nagging longer-term issues that "keep me awake at night." While Canada's unemployment rate dipped below 6 per cent last month for the first time since the Great Recession of 2008-09, unemployment among youth workers – 15 to 24 – is nearly 11 per cent. Mr. Poloz lamented that the proportion of people 15 to 24 who are in the active work force – what's known as the participation rate – wallowed at its lowest level in nearly 20 years during 2017, nearly fivepercentage points below its prerecession level. In a time when Canadians at the other end of the job market are retiring at rising rates, the young workers expected to fill their shoes are increasingly remaining on the sidelines.

And it is not because the labour market has been weak; in fact, far from it. The Canadian economy has added more than 440,000 full-time jobs in the past 12 months. Overall employment is on pace for the biggest annual increase since 2007. The unemployment rate has fallen by a full percentage point this year.

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So what's keeping youth workers away?

The economics team at National Bank of Canada was concerned enough about this – and Mr. Poloz's interrupted sleep patterns – to dig deeper. Their conclusion was pretty straightforward, and quite encouraging.

It's school.

In a research paper released on Wednesday, National Bank's analysis shows that if you exclude students from the youth population, the participation rate among non-students is nearly identical to prerecession levels.

"The shift to a lower participation rate in 2017 is exclusively driven by students preparing for an ever-changing labour market," National Bank economist Matthieu Arseneau wrote in the report.

Postsecondary-education enrolment in Canada has gone up by more than 20 per cent in the past decade, at a time when the country's youth population has actually declined. National Bank noted that almost 62 per cent of Canadians now have postsecondary education, nearly double the proportion of two decades ago, and the highest in the OECD.

All of that is a good thing for the longer-term health of the Canadian economy. Given the demographic pressures that have slowed growth in Canada's labour force, education and skills development is crucial to improving productivity and, by extension, boosting labour's contribution to economic growth.

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In a separate research note earlier in the week, National Bank's chief economist, Stéfane Marion, said that higher-educated populations tend to have better employment levels in the prime working years – the 25-54 age group that is the most productive segment of the labour market.

It's probably no coincidence that Canada's prime-age employment rate is near a record high, and is about four percentage points higher than that of the United States – an economy that is believed to have reached essentially full employment.

By several other measures, Canada's youth job market looks not so bad at all. Full-time employment among 15- to 24-year-olds is up by nearly 75,000, or a strong 6 per cent, in the past 12 months. The youth employment rate has risen by 2.5 per cent. National Bank noted that youth wages have recently been growing faster than for the overall work force – "an indication of a relatively tight labour market," Mr. Arseneau wrote.

That brings us to the other related issue that Mr. Poloz identified as contributing to his sleep deprivation. He noted that Canada now has more than 250,000 job vacancies, the highest on record. "Canadian business leaders say that most of these vacancies are unfilled because they cannot find workers with the right skills," Mr. Poloz said.

This could be a key motivation for more youth-age workers to remain in school longer; it reflects a broad response to what employers are demanding, and are increasingly willing to reward.

But in the shorter term, this problem matching available workers to vacancies may present a challenge to employment growth, and therefore broader economic potential.

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As Mr. Poloz said in his speech, "The economy is reaching a stage where more efficient job matching and increased work-force engagement will be our main means of building economic capacity."

At earlier stages of Canada's economic recovery, this skills gap was less pressing, as there was a general oversupply of labour. But now that the labour market has much less slack in it, these mismatches will pose an increasing impediment to employers looking to expand.

As the labour market approaches what is statistically considered full employment in 2018, the skills gap could strongly influence wage inflation and labour participation, while playing a considerable role in the Bank of Canada's assessment of the economic capacity and labour slack. It could be one of the most important behind-the-scenes influences on the pace of interest rates in the next 12 months.

Rob Carrick discusses the results of a survey if Millennials which sheds some light on the struggles this age group is facing in the job market.

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