The Labour Market: Recovery, Gaps and Strategies

This companion paper to the Fall 2021 Economic Outlook focuses on the Canadian labour market. Specifically, the key attributes of the current labour market; the main gaps in the labour market and their root causes; and strategies that could be adopted by both business and governments to address these gaps. There is an opportunity for Canada, after a strong recovery, to redress longstanding labour market fault lines and to take steps toward delivering good jobs, good wages and economic prosperity.

Highlights

• There is positive news in this Fall 2021 Economic Outlook as employment has returned to pre-pandemic levels. There remain pockets of the labour market that have not fully recovered, including older workers. Women, however, are now participating in the workforce at a higher rate than pre-pandemic. 
• As a result of this recovery, the government has begun tapering its support programs for workers and employers, with remaining programs expiring in May 2022. 
• The pandemic has widened income inequality. Higher income workers were more likely to be employed and receive wage increases during the pandemic than lower income workers. As well, many workers in “essential services” were not able to reap a risk premium as many were locked into collective agreements. With those collective agreements now set to expire, an increased demand for labour and higher rates of inflation, workers will seek higher wage increases in 2022 although it remains to be seen whether this will result in a reduction in income inequality. 
• One of the most significant outcomes of the pandemic on the labour market is that it has exacerbated pre-existing labour shortages. Prior to the pandemic, Canada experienced labour shortages, largely as a result of demographic trends affecting the size of the working age population, and a mismatch between the skills of the unemployed and the skills required for vacant jobs. Shortages in the technology and health care sectors became acute as a result of increased demand during the pandemic. As well, the Canadian labour force is now experiencing a shortage of lower skilled workers at wages that were sufficient to clear the market prior to the pandemic. 
• In order to redress labour shortages, investment by both the public and private sector in skills training remains a key strategy. As well, it will be important to enhance our immigration strategy to: reduce barriers for new immigrants to use their skills; expedite the immigration process; and increase the absolute numbers of immigrants. Finally, a strategy to encourage older workers to return to the workforce and retain them beyond age 65 would increase the supply of labour. 
• A further significant outcome of the pandemic is that it has exacerbated Canada’s labour productivity challenge. Prior to the pandemic, Canada’s labour productivity growth rate lagged compared to other OECD countries. Canada's productivity worsened during the pandemic, both absolutely and in relation to the United States. 
• Redress of Canada’s level and growth of productivity requires a multi-pronged strategy with both public and private sector investment in human and physical capital, R&D and innovation. Trade expansion and diversification and the reduction of barriers to internal trade can make an important contribution. The tax system deserves attention. An institution such as exists in Australia and the UK that researches, monitors and advises on measures to improve productivity could be of value in Canada.
• With a return to a high level of employment in Canada, there is now a need and unique opportunity to redress longstanding labour market fault lines, and deliver good jobs, good wages and economic prosperity.