The paradoxical jobs market

Today brought another non-farm payrolls report for the US that seems to ask more questions than it answers. The headline figure, 850,000 new jobs created in June, was way stronger than expected. However, the unemployment rate ticked up to 5.9 percent and the total number of jobs in the economy is still 6.8 million (or about 4 percent) below its pre-pandemic peak, seen in February 2020.  But despite these indications of continued slack in the jobs market, there are persistent reports that employers are finding it hard to attract workers back as the economy reopens. 

It's popular in Republican circles to suggest that the benefits introduced to ease the impact of the pandemic are creating an incentive for people to stay home a little longer rather than returning to the daily grind. That's almost certainly not the case in a broad-brush sense. As the linked article points out, states that have already withdrawn those benefits have not yet seen any change in the willingness of workers to seek employment.

All the same, it would be absurd -- and a denial of some fairly basis tenets of economics -- to deny that these benefits may be having some impact at the margin. As the benefits programs lapse in more states in the coming months, the labour force participation rate is likely to increase. In the meantime, the perceived shortage of labour is having the largely beneficial effect of pushing up wages as employers try to overcome any reluctance to return to work. Rising compensation even as employment remains significantly below its peak is a paradox few would have predicted a few months ago. 

This happens to be one of the months in which the Canadian employment report is released a week later than its US equivalent. With pandemic restrictions still in place north of the border, the data next Friday are likely to be materially weaker than today's US numbers. Interestingly, however, a new report from Capital Economics suggests that Canada will soon be seeing the same scale of labour shortages as the US, but for a very different reason. 

Even with a setback likely to show up in the June data, Canada's jobs market has recovered better than the US. Canada could well be back to pre-pandemic levels of employment by October, according to the report. A survey by the Canadian Federation of Independent Business, a small-business lobby group, suggests that almost 70 percent of firms are already being held back by labour shortages of one sort or another. 

The cause of this is not work-shyness on the part of the current labour force, but a slowdown in immigration as a result of the pandemic.  Inflows of new immigrants have all but ceased over the past year, and though they are set to resume now,  numbers will remain low into next year. Canada's willingness to take in new immigrants has for many years allowed it to cushion the impact of an aging population. Removal of that cushion will put pressure on the jobs market, leading to labour shortages and, most likely, to upward pressure on wages.