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It's hard to build a case for inflation in Canada when you can't see any wage pressure. And it's hard to see wage pressure when your job-market recovery has come off the rails.

Off the rails and into the headlines, in fact: Manufacturing giant Bombardier Inc. on Tuesday announced layoffs of 1,700 workers in its aerospace division. A week ago, Sears Canada Inc. said it would cut 1,628 jobs. Last month, it was Potash Corp. of Saskatchewan Inc. cutting 1,000 jobs.

These are just the latest bold-lettered chapter headings in a Canadian employment story that has been darkening, after being such a bright light earlier in the economic recovery. Statistics Canada's Labour Force Survey (LFS), the most-watched measure of the job market, showed a decline of 46,000 jobs in December. After adding an average of 22,500 positions a month from the start of the jobs recovery in mid-2009 to the end of 2012 (nearly one million jobs in total), the economy added just 8,500 jobs a month in 2013 – including virtually no growth at all in the last four months of the year.

Beyond the high-profile layoffs, there is persistent evidence that Canada's employers have considerably scaled back their hiring. Statscan's monthly job-vacancy report, released Tuesday, showed that the country's total number of job vacancies in October were down 37,000, or nearly 14 per cent, from a year earlier. The ratio of unemployed Canadians to job vacancies stood at 5.7, up from 5.1 a year earlier.

Unfortunately, the job-vacancy numbers are a little dated, so we don't yet know how they equate to the deterioration in the LFS job totals over the last two months of 2013. However, we do know that the unemployed-to-vacancies ratio had spent most of the year at significantly higher levels than had been previously seen in this indicator's short history (Statscan only started tracking these data in 2011). As the job market has slipped into a rut, the number of people competing for each opening has swelled. It puts employers in the driver's seat when hiring – and it's a recipe for paltry wage growth.

Little wonder, then, that average hourly wages in Canada were essentially flat for the six months ended in October. And this stagnation in Canadians' income has been playing a major role in containing the cost pressures on the one hand, and buying power on the other, that are so essential to feeding consumer price inflation.

This is why the revival of the job market is such a critical pillar in reversing Canada's increasingly worrisome disinflationary trend and returning inflation to healthier levels. And, by extension, why Bank of Canada Governor Stephen Poloz has placed so much emphasis on business investment and new-business formation in his recovery road map; these will generate the jobs to swing the hiring balance, and put upward pressure on wages.

There are a few hints that better times are on the way. The unemployed-to-vacancies ratio in October, while still high, had come off its highs by October. Wage growth picked up in the last two months of the year. The Bank of Canada's Business Outlook Survey, released last week, indicated improving intentions for both business investment and hiring in 2014.

But good intentions don't count for much unless and until companies follow through, and we're a long way from re-establishing a clear trend toward a tighter labour market. Until we do, Canada's inflation puzzle will remain unsolved.

Follow David Parkinson on Twitter: @ParkinsonGlobeOpens in a new window

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