In a speech in Toronto hosted by the Public Policy Forum, Mr. Macklem said Canada’s labor market is overheating, with unemployment near record lows and businesses struggling to find workers. This fuels inflation as companies raise wages to compete for employees. “We need to rebalance the labor market,” Mr Macklem said. “This will be a difficult adjustment. We want to do this in the best possible way for Canadian workers and businesses.” Mr Macklem’s comments come after a jobs report came out last Friday. Employment rose by 108,000 in October, making up for all the jobs lost during the summer slowdown. Average hourly wages rose 5.6 percent this month from a year earlier, while the jobless rate held steady at 5.2 percent as labor force participation rose. The strength of the labor market is a challenge for the central bank. Mr. Macklem and his team are actively trying to slow down Canada’s economy – something they see as necessary to restore price stability. “The unemployment rate in June hit a record low – and while that looks good, it’s not sustainable,” Mr Macklem said. “The tightness in the labor market is a symptom of the general imbalance between demand and supply that is fueling inflation and hurting all Canadians.” The central bank has raised interest rates six times since March, raising the benchmark rate to 3.75 percent from 0.25 percent at the start of the year. Mr Macklem said interest rates must rise further and financial markets expect further hikes in December and January. The Bank of Canada forecasts almost zero growth in the coming quarters as higher interest rates curb spending and investment. This will lead to higher levels of unemployment, Mr Macklem said. At the same time, he suggested that the increased level of job vacancies could provide something of a cushion to reduce labor demand. The hope is that companies remove the help-seeking signs without also laying off too many workers. “Generally speaking, when job vacancies are high, as they are now, the reduction in vacancies does not lead to as much of an increase in unemployment as when job vacancies are initially low,” Mr Macklem said. He said the Bank of Canada’s new analysis “suggests that the unemployment rate will rise somewhat if the job vacancy rate returns to more normal levels. But it would not be high unemployment by historical data.” Tight labor markets are a product of both demand and supply. Canada’s labor supply has been squeezed by a combination of an aging and retiring workforce and a drop in immigration during the COVID-19 pandemic. Mr Macklem said the labor supply could improve as immigration normalizes. Immigration has already returned to pre-pandemic levels, and the federal government said last week it would boost immigration levels in the coming years. Increasing supply, however, “is not a substitute for using monetary policy to moderate demand and balance demand and supply,” Mr Macklem said. Inflation has trended downward in recent months, with consumer price index inflation easing to 6.9% in September from a four-decade high of 8.1% in June. Statistics Canada will release the October CPI numbers next Wednesday.
