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Although the Canadian job data for September proved to be a big yawn in many respects, the results do illustrate important trends in the labour force and in wage growth. To begin with, statistically, there was no change in the number of jobs created--- 21,000 new jobs--- and in the unemployment rate--- at 5.2%. There has been no significant job growth all summer long and this likely will continue for the balance of the year. These data, however, challenge the Bank of Canada’s claim that the economy is experiencing excess demand and this is why interest rates have to climb.

Firstly, the unemployment number, albeit slightly down from 5.4% to 5.2%, is supported by the fact that fewer people told Statistics Canada that they are looking for work. The agency emphasizes that both the total size of the labour force—or the number of people who are either employed or unemployed—as well as the participation rate have trended downwards since May. So much so, that the total labour force shrunk by 79,000 since May. The decline in participation rate is turning out to be a major factor keeping the unemployment rate from rising. More to the point, the Bank of Canada, Governor Macklem claims “all the signs today point to an economy that is clearly in excess demand “and “labour markets remain very tight”, (Halifax speech Oct 6). However, this ignores the fundamental factor affecting the job market. A shrinking workforce is responsible for low unemployment and no amount of monetary tightening will change this demographic trend that has been underway for more than a decade. 

Many analysts have raised the prospects of a wage-price spiral gripping the economy such as that experienced in the 1970s. The powerful unions were able to achieve high-wage settlements that reverberated throughout many key industries. Today, unions no longer have that bargaining power. Furthermore, average hourly wages have topped out at 5% annually for the past four months, well below the increase in consumer prices, running around 7%. This is disappointing to the average worker whose wage increases have failed to keep up with inflation. But there is no evidence of a wage-price spiral underway. 

Wage Gains by Industry over the last 12 months

More importantly, the largest wage gains are in high-productivity sectors, such as professional, scientific, and technical services. There have been above-average wage gains in the hospitality industry, as employers face a labour shortage because of relatively low wages. No good purpose is served to restrain wages by raising interest rates for industries that have job openings but no takers. Many of the most important sectors---manufacturing, public administration, and finance/real estate--- experienced wage increases well below the CPI are not directly contributing to overall inflation. 

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