Unemployment is still hovering near record lows more than a year into the Bank of Canada’s aggressive interest rate hiking cycle, bucking expectations that the labour market would start to soften by now.

The Bank of Canada has put unemployment in its sights as it aims to bring inflation down to a target of two per cent, but resiliency in Canada’s jobs market – even as inflation has begun to drop – has prompted a key question: does unemployment really need to go up for inflation to go down?

Economists who spoke with BNNBloomberg.ca pointed out that inflation has already come down without major job losses – but the question remains over what will happen next.

“It's almost the macroeconomic question of 2023,” said Brendon Bernard, senior economist at Indeed.

“Historically, large drop offs in inflation have often coincided with deterioration in the economy … The question is, is this time different?”

DO PEOPLE REALLY NEED TO LOSE THEIR JOBS?

Economist Jim Stanford, director at the Centre for Future Work, said the answer depends on the situation – but in this case, it seems unlikely, because inflation has already been declining with little change to the unemployment rate.

“In the current setting, I would say absolutely not,” he said. “We don't need to have a recession, we don't need to increase unemployment, we don't need throw people out of work or keep people out of work for inflation to come down, and the proof is, it's happening.”

Stanford said the current inflationary picture has been driven by factors like the global pandemic, supply chain constraints, high corporate profits and the conflict in Ukraine.

“Those were all unique, mostly global and mostly supply-side factors that had nothing to do with the labour market,” he said.

Stanford also noted that wages have lagged behind prices, calling into question fears of a “wage-price spiral” that fed inflation in the 1970s. Stanford said it’s not the same situation today, and he thinks focusing on the labour market is the wrong approach.

“I'm worried that policy may be driven by dogma rather than evidence,” he said.

Bernard said it’s clear that inflation has started coming down without major job losses. The question now, he said, is whether inflation can get back to a normal level – such as the central bank’s two per cent target -- while unemployment stays low.

He also noted that Canada’s economy is closely connected with the U.S.’s – a dynamic that influences inflation beyond domestic labour impacts.

LABOUR MARKET SNAPSHOT

Statistics Canada’s latest jobs report placed the April unemployment rate at five per cent, where it’s held since December. That’s close to the record low of 4.9 per cent recorded in June and July 2022.

The unemployment figure slightly beat economists’ expectations, and the job gains of 41,400 last month blew past the expectations for 20,000.

Meanwhile, inflation has steadily declined from its high of 8.1 per cent in June 2022. Canada’s Consumer Price Index came in at 4.3 per cent in Statistics Canada’s update for March, with the next report expected on May 16. 

WAGE GAINS, JOB VACANCIES

Flat unemployment rate aside, another interesting trend emerged in last month’s jobs report: wage growth surpassed inflation, with a rate of 5.2 per cent compared with 4.3 per cent inflation.

Bernard and Stanford both say there is room for workers’ wages to catch up after falling behind prices over the last few years.

However, the effects on economic conditions are still unknown, Bernard said, pointing out that job vacancies posted on Indeed.com have come down compared with last year, suggesting worker shortage and related hot labour market have cooled slightly.

“It's kind of surprising that (wage growth) has remained quite strong, even as job vacancies have cooled. We'll see where things go from there,” he said, adding that slowing job vacancies could eventually show up in elevated unemployment numbers.

Stanford said he sees it as “only fair” that workers’ wages begin catching up, and he sees room for a few years of wage gains without disruptive economic effects – and he made the case that wage gains could even have a disinflationary effect on corporate profits.

However, Stanford said he’s concerned that the wage growth trend could result in the Bank of Canada taking closer aim at the labour market in its monetary policy approach. 

WHAT HAPPENS NEXT?

The central bank’s key interest rate has risen by 4.25 percentage points since 2022 to the current rate of 4.5 per cent. Stanford said typically, interest rates rising so dramatically has always caused a recession, but “in a way, we’re in uncharted territory.”

“I don't think we're out of the woods yet, but I'm encouraged at how consistent the labour market has been,” he said.

Bernard, too, said the labour market strength has been impressive, but he warned that people should temper their expectations, as interest rate increases can historically take a long time to appear in jobs data.

“It is tempting to be hopeful that, 'Hey, maybe we could be in for a soft landing, and there's some reasons why that might be the case,'” he said. “But we still need to pump the brakes on just being fully optimistic.”