Deputy Governor Lawrence Schembri discusses how the Canadian labour market has changed during the pandemic. He explains why better tools to measure the health of the job market will help the Bank of Canada set monetary policy that supports the recovery.
Uncertainty in the labour market has risen
Even before the pandemic, factors such as globalization, technological change and population aging were shifting the way Canadians work. That has made it difficult to gauge the health of the labour market. The pandemic accelerated some of these shifts and sparked new ones.
There is uncertainty about two issues in particular:
- the level of maximum sustainable employment
- the relationship between labour market conditions and inflation
Understanding how high the level of employment can get without sparking inflationary pressures is crucial. That’s because it helps the Bank determine how to best support the economy during the recovery from the pandemic.
While monetary policy cannot undo the impact of these forces on the labour market, it must deal with the resulting uncertainty.”
New tools can help assess the job market
Traditional tools to measure employment aren’t as useful as they once were, so the Bank is looking at new ways to measure spare capacity—or slack—in the labour market. The Bank has developed new tools to measure the impact of the pandemic on Canadian workers and employers. Our goals are to better assess how the recovery in jobs varies among different types of workers and to determine whether Canadians are working as many hours as they would like in jobs that match their skills.
Overall, the labour market has recovered well, and groups that suffered the greatest job losses, such as women and youth, have regained jobs. But we still see areas of slack—some workers have been unemployed for a long time, and wage growth continues to lag.
Understanding slack helps us set monetary policy
The Bank’s goal is to support strong employment and output growth by keeping inflation low, stable and predictable. While inflation has risen above our 1 to 3 percent inflation control range in recent months due to transitory effects of rising energy prices and global supply constraints, medium-term inflation expectations have remained relatively well anchored.
By measuring the health of the labour market, the Bank can tell when:
- demand for goods and services is not balanced with what the economy supplies
- inflation pressures are rising or falling
The economy has made good progress toward recovery, but some excess capacity, or slack, remains. The better the Bank understands this issue, the better we are able to respond with policy that supports a full and inclusive recovery by bringing inflation sustainably back to the 2 percent target.
It’s our responsibility to meet the challenges posed by these labour market uncertainties. Canadians are counting on us to continue innovating and to strengthen our practice of monetary policy. And we are.”