Chief economist says policy, demographic changes keeping inflation steady
Recent policy and demographic changes could mean Canada’s unemployment rate will drop much further before wage pressures trigger inflation, according to a report from CIBC.
Released on Nov. 7, the report indicated the current unemployment rate, historically, would already be generating wage and price pressures that would affect inflation.
“But full employment ain’t what it used to be, and that’s good news for job seekers,” said Avery Shenfeld, CIBC’s chief economist. “Demographic and public policy changes in recent years have lowered the non-inflationary rate of unemployment. That will allow the Bank of Canada to keep rates low for long, and press ahead towards further labour market improvements.”
Last week, Statistics Canada reported the national unemployment rate to be 6.9 per cent for October, unchanged from the previous month.
Because an increasing number of workers are reaching retirement age, participation rates have dropped significantly. Combined with changes to immigration and foreign worker policies – such as targeting prospective employees with specific skills and stronger language proficiency – that has contributed to a lower jobless rate.
"Underemployment is, however, a factor that has led to an understatement of labour market slack relative to the past cycle," Shenfeld said. "There are close to 900,000 Canadians working part-time because that's all they can get, rather than by choice. That's a half-percentage point larger as a share of the workforce than when the economy had full employment in 2005. The additional hours they could offer up provides a cushion against wage and price pressures."
Another explanation for the shift might be attributed to declining unionization coverage, Shenfeld went on to say. He cited Canadian workers who are now competing with right-to-work states south of the border, as one example. That could reduce bargaining power and the wage inflation pace at any level of unemployment.
“All of this implies that the labour market has more room to run to lower unemployment rates before wage pressures threaten the Bank of Canada’s two per cent Consumer Price Index (CPI) target. Add to that some other factors putting downward pressure on CPI, and there are reasons for the Bank of Canada to eschew rate hikes until early 2015,” Shenfeld explained. “By that point, we expect Canada’s unemployment rate to be in the vicinity of 6.2 per cent, well below what had previously been the Bank of Canada’s comfort zone.”
