Bank of Canada governor Tiff Macklem has a message for employers and politicians: if you don’t like higher interest rates, then do something to expand the pool of available workers.

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Tiff Macklem turns tables on critics, calls on politicians, employers to boost supply of skilled labour Back to video

Macklem has given two speeches since Nov. 10. Both were on the labour market, and both made the point that inflation is being driven — in part — by acute labour shortages, which have put upward pressure on wages.

Average hourly pay increases are growing less fast than year-over-year increases in the consumer price index, but the central bank still contends that wages will have to slow to get inflation under control.

“We need to rebalance demand and supply in the labour market to relieve price pressures,” Macklem said Nov. 14. “Monetary policy affects demand. By raising interest rates, we are moderating spending, and that will reduce the demand for workers.”

The governor made his most recent remarks at the start of an international conference on diversity and inclusion that the Bank of Canada is hosting this week. That might strike some as an odd venue to discuss doubling down on higher borrowing costs, which the central bank concedes could tip the economy into a recession and will almost certainly drive up the unemployment rate.

However, between the lines of the governor’s speech were clues for how the men and women with more direct control over the labour market — the politicians who set the rules and legislate incentives, and the employers who do the hiring and decide how much to invest in their workforces — could make the Bank of Canada’s job easier in the future.\

The other way to rebalance supply and demand is to increase the supply of workers

Tiff Macklem

“The other way to rebalance supply and demand is to increase the supply of workers,” Macklem said. “That takes time, and with inflation already far too high and with elevated risks that high inflation becomes entrenched, increasing labour supply is not an alternative to slowing demand. But it is a complement. And the more we can do on supply, the less we will need to do on demand.”

What is to be done?

Inflation, as measured by year-over-year increases in the consumer price index, is running more than three times faster than the Bank of Canada’s two-per-cent target. Policymakers have responded by raising the benchmark interest rate to 3.75 per cent from nearly zero since March, and have signalled they probably won’t stop until the rate is higher than four per cent.

Macklem and his deputies on Governing Council have faced considerable criticism for both letting inflation get away from them, and then attempting to recover from that mistake by taking the economy to the brink of recession.

Over the past week, Macklem has subtly turned the tables, calling on the business community to invest in workers to tackle the mismatch between available talent and the jobs on offer.

The governor said last week that the post-pandemic bounce-back in immigration rates would help address the structural labour shortages stemming from the number of Canadians aging out of the workforce with fewer working-age Canadians to replace them. In order for these immigration target strategies to work for economic growth, Macklem argued that the business community needs to do its part in investing in its workforce.

“Increased immigration adds potential workers, and governments need to ensure newcomers have a smooth path into the workforce, with credential recognition and settlement support like language and skills training,” Macklem said during a Nov. 10 speech organized by the Public Policy Forum in Toronto. “Businesses need to invest in training so we can reduce the skills mismatch. And workers need to invest in gaining the skills the new economy needs.”

Win-win situation

Macklem described a win-win situation, noting that the strength of the labour market not only benefited recent immigrants, but he also pointed to data that suggest immigration targets will account for over two-thirds of expected growth in Canada’s potential output. He added this put Canada ahead of some of its peers including the United States, according to the growth outlook in the October Monetary Policy Report.

“Many advanced economies whose populations are aging are looking to increased immigration to meet the needs of their labour markets,” Macklem said. “But because of relatively higher immigration targets, Canada will have an advantage in coming years — Canada’s population growth is expected to far exceed that of other G7 countries.”

During the height of the pandemic, Canada fell short of its 2020 immigration target of 156,000 people, or 100,000 workers, as borders shut down. Once these restrictions were lifted, Canada met its target of 401,000 people in 2021. The Liberal government also recently established a new target of about 1.4 million people over the next three years in a push to target workers for sectors with the greatest need for labour, including health care and construction.

The government also hopes this will begin to unwind some of the structural snarls in the labour market, largely stemming from the sheer number of Canadians aging out of the workforce.

‘Grey tsunami’

Labour market research analysis from the Canadian Centre for Policy Alternatives found that 73,000 Canadians retired in the year ending August 2022, amounting to a leap of 32 per cent compared to last year. CCPA senior economist David Macdonald found that the health care and education sectors were particularly hit by this “Grey Tsunami.”

It’s not just Macklem who flagged this growing problem, central bank governors of years past are also wary of the labour rift left in this mass retirement wake. Former Bank of Canada governor Stephen Poloz identified the risk the aging baby boomer generation could pose to global growth in his book The Next Age of Uncertainty. This generation, born between the years 1946 and 1964, would now be between the ages of 58 and 76.

“Even if better health and longer lifespans mean people remain in the workforce longer than in the past, the next ten to twenty years will still see a significant slowdown in global labour force growth,” wrote Poloz, who now serves as a special adviser to law firm Osler, Hoskin & Harcourt.

A report by the Royal Bank of Canada’s economics team pointed to international students as a key pillar to Canada’s immigration strategy during a structural demographic squeeze. Authors Ben Richardson and Yadullah Hussain found that about 17 per cent of permanent residents and nearly 40 per cent of economic immigrants have prior Canadian study experience and often specialize in fields where labour shortages exist, such as engineering, math and computer sciences.

‘They need workers to pay for this’

Mikal Skuterud, professor of economics at the University of Waterloo, pushed back on the demographic structural labour shortage narrative. He argued that the number of retirements impacting the labour pool has been overplayed and that the impact of aging was more of a trend line that led to tighter market conditions rather than a sudden glut of grey-haired workers leaving the workforce in droves. He argued against the notion that there is a severe skills mismatch, since many of the job vacancies since the pandemic recovery exist in industries where fewer skills are required.

“The name of the game for the Bank of Canada is to dampen the increases in nominal wage growth,” Skuterud said. “That’s what needs to happen in order for the Bank of Canada to reach their inflation mandate target of two per cent. They need workers to pay for this, that’s the bottom line.”

Skuterud added that immigration is an effective way to dampen the nominal wage growth to keep the wage pace from accelerating too quickly and triggering a wage-price spiral, or a positive feedback loop where high wages translates to higher product costs, which then turns back into upward pressures on wages.

Macklem warned that the labour market would need to slow further in order to slow down the economy and give supply a chance to catch up and ultimately cool down inflation.

“Slower economic growth will likely lead to higher unemployment,” Macklem said on Nov. 10. “We know that job losses have a human cost. But because the labour market is so hot and we have an exceptionally high number of vacant jobs, there is scope to cool the labour market without causing the kind of large surge in unemployment that we have typically experienced in recessions.”

• Email: shughes@postmedia.com | Twitter: StephHughes95