Earlier this month, Bank of Canada governor Tiff Macklem spoke at the Public Policy Forum in Toronto regarding how the labour market affects inflation.
His comments centred around the concept of “maximum sustainable employment”. If employment is above this level, according to Macklem, it puts “upward pressure on prices, and that’s going to push inflation above” the Bank of Canada’s target of 2% inflation.
If it’s below these prices, it “puts downward pressure on inflation, pushing it below the target.”
That being said, Macklem admitted that “maximum sustainable employment is not directly measurable” and that it “is more of a concept than a number.” Not only that, but he indicated that it’s difficult to know when we have reached it “because we have to infer where it is, and labour market indicators give us clear signals when we’re well above or below it.”
During his address, Macklem claimed that Canada’s current labour market is above the undefined and unmeasurable maximum sustainable employment.
He reported that while “inflation in Canada partly reflects global factors, things like sharply higher prices for many commodities and international traded goods . . . much of the inflation we’re experiencing today reflects domestic factors, namely excess demand in the Canadian economy.”
That demand, Macklem expressed, is the result of an overheated economy, elevated job vacancies, and widespread labour shortages.
The national unemployment rate hit a record low this past June, but Macklem warns that this number “is not sustainable.” Not only that, but he claimed that our tight labour market is actually driving inflation.
The tightness of the labour market is a symptom of the general imbalance between demand and supply, and that is fuelling inflation, which is hurting all Canadians.
He then went on to say that one of the reasons the Bank of Canada has continually increased interest rates this year is to reduce labour demand—in other words, make sure there are more workers in the labour market than is needed.
Since March, we’ve been raising our policy interest rate to help bring inflation back to our target. Higher interest rates will work to slow spending and labour demand in the economy and, over time, will relieve domestic inflationary pressures.
He then provided attendees a brief timeline of the national labour market since the start of the pandemic.
Macklem started by saying that about 3 million people in the Canadian workforce lost their jobs by April 2020 and an additional 2.5 million were working less than half of their usual hours.
And while this had been the fastest and longest that so much of the economy has ever been shut down, Macklem said that the recovery from this economic shutdown was the fastest recovery the country has ever seen after a recession.
In fact, “just four months after the employment lows of April, nearly two-thirds of the jobs losses [had been] recouped.”
In the two years since then, Canada’s labour market has since evolved to become much tighter. Not only are the numbers above pre-pandemic levels, but “we’re in excess demand, with the economy’s need for labour outpacing its ability to supply it.”
Despite hitting unemployment of only 4.9% this past June, businesses in the country were reporting 1 million job vacancies during the same period.
In other words, more of the labour force were working than ever before, but employers were still needing more workers. Macklem blamed this on primarily two reasons: increased retirements and reduced immigration during the pandemic.
With more people leaving the labour force through retirement and fewer people entering the labour market through immigration, it led to more people already in the labour market being able to find work, pushing down unemployment.
This isn’t where Macklem wants to see the labour market, however. He views it as being imbalanced. According to him, “demand of labour needs to moderate so supply can catch up.”
Here’s the thing though. A tight labour market is good for workers. If there is an increased demand for workers, it means that bargaining power increases for workers. They can demand better pay, better benefits, and better working conditions. It also makes it easier for them to unionize or otherwise collectively bargain.
When demand for workers decreases and unemployment increases, it decreases bargaining power for workers, because it’s easier for employers to fire workers and replace them from the long list of applicants waiting in the EI lines.
Macklem sort of addresses this even.
Generally, low unemployment and high demand for workers benefits the Canadian economy. Good jobs are a fast way to reduce inequality and ensure that Canadians have the income they need to meet the needs of their families.
But that’s not good enough. Macklem wants the working class to suffer for the betterment of the broader economy
“But right now, we need the economy to slow down. With more modest spending growth, the demand for labour by businesses will ease. Vacancies will decline and the labour market will come into better balance. This will relieve price pressures.”
Apparently, inflation is our fault, because we’re spending more. Never mind the fact that we’re spending more because prices of skyrocketed. Groceries are higher. Gas is higher. And that has nothing to do with workers finally having a job.
Not a single time in his opening remarks did Macklem blame corporations for inflation.
No mention of Loblaws reporting nearly $1 billion in profit during the first half of the year, for example, or Telus’s second quarter profits being 42% over the previous second quarter.
And if corporations are posting profits, then they’re charging more for their products and services than it costs to provide them. Which means they’re priced too high.
Perhaps Macklem should find ways to get corporations to reduce their profits, instead of expecting workers to lose their jobs.
You can watch Macklem’s address, including his fielding of media questions, in the 2-hour video below.