By BDC
MONTREAL, Canada – Despite maintaining positive growth, the Canadian economy continues to slow. In April, the national unemployment rate stood at 6.1 percent – the highest since the end of the pandemic.
When the labour market eases, we normally expect wage growth to also slow, as bargaining power shifts to employers. However, we have yet to see a significant deceleration in wages, probably because of structural changes in the economy that will continue to influence the labour market. Will business leaders get a break on wages this year?
Labour shortages becoming rarer
Employment remains solid. Since the start of 2024, an average of 41,500 jobs have been created per month, compared with a monthly pace of 35,000 in 2023. Nonetheless, there are signs of easing of labour market conditions which reflects both lower demand for new workers and a greater supply of potential employees. The larger supply of workers is coming from several sources.
The departure of the baby-boom generation will weigh on the workforce until at least 2031, when the last of its members reach age 65. However, retirements have so far been slower than expected, with the number of boomers working past age 65 continuing to grow.
Companies have increasingly turned to newcomers to meet their labour needs in recent years. This category of worker represents an important source of new employees. Indeed, without immigration, Canada’s labour force would see little or no growth this decade. After a drop during the pandemic, immigration is set to increase significantly between 2022 and 2025, with the annual immigration rate projected to hit around 1.1 percent over the period.
With the economy slowing, layoffs have increased although not to alarming levels.
These factors have meant the pool of potential workers has grown faster than new job creation. Job vacancies began to decline in the second half of 2023. Employers, therefore, have more options for finding replacement workers and filling new positions.
Despite this ongoing rebalancing, the Canadian labour market remains robust. At the start of the year, 43 percent of companies were planning staff increases, and there were almost 660,000 job vacancies across the country in February.
Still, the pace of job creation is normalizing, easing the pressure on the labour market. Only 22 percent of companies surveyed by the Bank of Canada report production difficulties due to staff shortages. The historical average is 31 percent and, therefore, we’ve seen a clear improvement for companies.
Does this mean smaller salary increases?
The latest national employment report showed that the average hourly wage rose by 4.7 percent year-on-year in April. While it takes time for wages to return to normal levels after a bout of inflation, the process has likely been slower this cycle than many employers (and probably the Bank of Canada) had hoped.
Although companies generally expect salaries to increase at a slower pace than in the last two years, many firms continue to believe wage growth will remain high. The proportion of companies expecting abnormally high wage growth to persist until 2025 has risen from 14 percent at the end of 2023 to 23% in 2024. This is a sign that employers are still feeling pressure from workers for higher pay.
Expectations of substantially higher wages by workers was confirmed in a recent Bank of Canada report. It found that although private sector employees still expect higher wage increases than public sector employees, wage expectations are rising faster among the latter group.
Moreover, Canada is targeting a decrease in temporary resident population. Therefore, pandemic measures to ease the labour market conditions are getting undo. Stricter access to limit the number of temporary workers will undoubtedly have an impact on business owners who have been relying on the program for the past years. As the share of low-wage workers that applied through the program diminishes from 30 to 20 percent of a business workforce (outside of agriculture, construction and healthcare), labour issues could come back fast and add additional pressure of wages.
Inflation is slowing, will wages follow?
For the time being, wage adjustments remain above the historical average. They could reach 3.5 percent growth in 2024. The vast majority of companies report that they still have to take the high cost of living into account when setting wages.
While inflation is slowing, interest rates remain high and continue to have a large impact on household budgets. Many people will continue to see their purchasing power diminish, even if the speed of price increases slows and the Bank of Canada’s key interest rate remains stable.
As a result, wage growth will slow somewhat, but while inflation remains above target and interest rates high, companies will be faced with rising labour costs. Indeed, this has been reflected in recent minimum wage increases across the country.
In a nutshell …
- As an employer, you’re likely to continue to face pressure for larger-than-desired pay hikes, even as the job market becomes more balanced and competition for workers less intense.
- Efforts to improve labour productivity, keep up with wage pressures and ensure the successful integration of newcomers into the labour market will be essential to the stability of Canada’s labour market.
- The job market is constantly changing, and the workforce will remain a key issue in the coming years. A strategic plan for managing your human resources is essential to ensure the growth of your business and the loyalty of your staff.
- BDC offers you a wide range of tools to help you manage your workforce challenges.
