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Flat hiring in Canada despite population growth

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Despite strong population growth, the employment situation in Canada remained stagnant last month, signaling a loosening labor market in line with the weakening economy. While this may offer some comfort to the central bank, there is cause for concern as wages experienced their strongest rise in almost three years.

Unchanged employment levels

According to Statistics Canada’s report on Friday, the number of employed working-aged people in Canada saw little change in December, with only a net increase of 100 jobs compared to the previous month. Consequently, the unemployment rate remained steady at 5.8%. This level of job creation falls short of market expectations, which predicted the addition of a modest 15,000 jobs and a slightly higher unemployment rate of 5.9%.

Employment decline and labor force growth

Throughout the year, the rate of employment in the country gradually declined, while the jobless rate increased during five of the last seven months prior to November. This trend reflects the challenge of keeping up with Canada’s growing labor force, which has outpaced hiring in recent months. Since mid-2022, the jobless rate has gradually risen from a record low of 4.9%.

Modest employment gains and resilient economy

Despite the struggling wider economy, employment gains remained relatively modest before last month. In the third quarter of the year, the economy contracted on an annualized basis. Throughout the second half of 2023, employment growth averaged 23,000 jobs per month, which is less than half the average monthly gain observed in the first half of the year. On the other hand, the population aged 15 and older grew by approximately 75,000 in December, averaging around 79,000 per month for the entire year. As a result, the percentage of the working-age population employed decreased by 0.2 percentage points to 61.6% last month, marking the fifth decline in the past six months.

Comparison with U.S. labor market

When applying the U.S. Labor Department’s methodology, Canada’s unemployment rate for December remained steady at 4.7%. In contrast, the United States experienced an uptick in hiring during the same period, with the addition of 216,000 jobs and an unchanged unemployment rate of 3.7%, as reported by the Labor Department.

Economic impact on job market

Douglas Porter, Chief Economist at the Bank of Montreal, commented on the lackluster results, noting that the broader economic softening is finally starting to affect the job market.

Job Growth and Unemployment in Canada: A Closer Look

In December, job growth in Canada was driven by the services sector, which saw a significant increase of 43,100 positions. However, this positive trend was offset by a decline of 42,900 jobs in the goods-producing sector, particularly in agriculture, construction, and manufacturing. The data agency reported a relatively balanced employment situation, with a loss of 23,500 full-time jobs and the addition of 23,600 part-time roles.

The overall number of unemployed individuals in Canada reached 1.2 million in December, reflecting a 19.3% increase compared to the previous year.

As the Bank of Canada remains concerned about stagnant wage growth, economists are closely observing the 5.7% surge in average hourly wages for permanent employees. This marked the largest annual increase since January 2021. On January 24, the central bank will decide on interest rates, seeking indications that its previous aggressive rate hikes have been successful in curbing inflation. Despite projections of subdued near-term economic growth following a contraction in the third quarter of the year, the Bank of Canada will carefully evaluate the need for further rate adjustments.

“While a decline in the employment rate signals ongoing weakness in the labor market, the decreasing participation rate and accelerating wage growth indicate that the market conditions are not yet loose enough for the Bank of Canada to consider cutting interest rates,” said Andrew Grantham, senior economist at CIBC Capital Markets.

The labor-force participation rate, which measures the proportion of the working-age population who are either employed or unemployed, experienced a slight decline of 0.2 points from the previous month, reaching 65.4% in December. This rate has steadily declined since its recent peak of 65.7% in June, primarily due to a drop in the youth participation rate.

Economists widely anticipate that unemployment will gradually increase in the coming months, potentially exerting downward pressure on wage growth. This scenario could provide the groundwork for the Bank of Canada to consider reducing the benchmark policy rate, which has remained at a more than two-decade high of 5% since July.

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