Canada’s jobless rate drops to a new low, ensuring more interest-rate hikes

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Canada’s jobless rate dropped to 5.2 per cent, a modern low, all but guaranteeing another outsized increase in interest rates when policymakers at the Bank of Canada end their next round of deliberations on June 1.

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Statistics Canada’s latest monthly survey of the labour market didn’t turn up stunning results like it has over the previous few months. Employment was little changed in April, as absences from illness and disability appeared to offset employers’ desire to hire to keep up with strong demand for goods and services. Hours worked declined 1.9 per cent from April, although the new level still was 1.3 per cent more than at the eve of the pandemic in February 2020.

It’s possible the country’s labour market is hitting its limits after adding more than 400,000 workers over February and March, an unsustainable pace. In April, Statistics Canada’s household survey implied that employers added 15,300 positions, a statistically insignificant change because it was smaller than the poll’s margin of error. The unemployment rate for workers aged 25 to 54 dropped to 4.3 per cent, the lowest since comparable data became available in 1976.

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“Slower momentum was inevitable,” said Brandon Bernard, an economist at Indeed, the hiring website.

The Bank of Canada in April concluded that demand had overshot supply, contributing to the fastest inflation in more than three decades. The central bank raised its benchmark rate a half-point in April, and governor Tiff Macklem last month hinted he and his deputies likely will do so again in June. The policy rate is currently one per cent, compared with 0.25 per cent at the start of the year.

Statistics Canada said average hourly wages increased 3.3 per cent from April 2021, strong by recent historical standards, but still well short of inflation, as the consumer price index surged almost seven per cent over the same period.

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“Multiple indicators point to a shrinking labour pool and an overheated market without much room to further expand,” said Tu Nguyen, an economist at RSM Canada LLP, an accounting firm. “The tightening job market adds pressure for the Bank of Canada to further raise interest rates, which will likely reach two per cent by the end of the summer, a much faster pace than previously anticipated.”

The labour market is tight, but not yet tight enough to significantly drop the number of long-term unemployed, as some 224,000 people had been unemployed for more than 27 weeks in April, compared with about 180,000 at the start of the pandemic. That’s a concern because research shows that the longer people spend on the sidelines of the economy, the harder it becomes for them to find decent jobs. Long-term unemployment has accounted for about 20 per cent of total unemployment since January, up from 15.6 per cent in February 2020.

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Royce Mendes, head of macro strategy at Desjardins Group, flagged a drop in employment in goods producing industries as another red flag. The sideways nature of the headline numbers “might be an early indication that rate hikes are creating more pain for the Canadian economy than they are south of the border in the U.S.,” where employers added some 428,000 positions last month, leaving the unemployment rate unchanged at 3.6 per cent.

Still, that won’t stop the Bank of Canada from raising borrowing costs, as its forecasts see inflation accelerating well ahead of its two-per-cent target into next year. Macklem has said repeatedly in recent weeks that he’s prepared to lift the benchmark rate above three per cent if that’s what it takes to relieve price pressures.

“The economy is still by most measures overheating,” Mendes said in a note.

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