Canada’s employment market is now beyond hot, and has begun overheating. Statistics Canada (Stat Can) reported March reached a new record low for the unemployment rate. Labor markets running this tight are seen as overheated and contribute to even higher inflation. Experts see this reinforcing the need for higher interest rates — even endorsing a more aggressive rate hike schedule.
The Canadian Unemployment Rate Has Never Been Lower
Canada’s unemployment rate reached a record low last month. The rate fell to 5.3% in March, down 0.2 points from the previous month. Unemployment recovered to pre-2020 levels back in October. The agency says it was the lowest record on record, going back to the 1970s.
The adjusted unemployment rate is the share of people who want a job but didn’t look. The agency said this rate fell to 7.2% in March, falling below pre-pandemic levels for the first time. Not quite a record, but low enough that this monetary environment may be too easy.
Canadian Unemployment Will Create More Inflation Pressure
Record low unemployment is quickly becoming another inflation challenge. “Considering strong competition, companies are planning to raise wages at an unprecedented rate to attract/retain talent…” said Matthieu Arseneau, Deputy Chief Economist at National Bank of Canada.
Referencing the Bank of Canada’s Business Outlook Survey he adds, “This is a situation that the central bank needs to address, as such an environment could jeopardize the ability to achieve its long-term inflation target.”
Arseneau argues this environment was suited to a crisis but hasn’t changed much as the economy improved. With unemployment so tight it’s driving non-productive wage growth. This will make tackling inflation a more significant challenge. He sees the central bank hiking interest rates by 50 basis points next week to try and tame some of this excess.
A Tight Labor Market Will Support More Aggressive Rate Hikes
National Bank isn’t alone when it comes to seeing the labor market is too tight. Royce Mendes, Desjardins’ head of macro strategy, expressed a similar sentiment and expects the Bank of Canada to respond strongly to the data.
“The labor market now seems to be on the verge of overheating, which would create unwanted inflationary pressures,” said Mendes.
Adding, “As a result, look for aggressive action from the Bank of Canada next week to bring the economy back into balance. Central bankers will likely not only raise the target for the policy rate by 50bps, but they will also initiate a program to reduce their bond holdings.”
The program to reduce bond holdings is called quantitative tightening, and it’s the opposite of the program that helped boost home prices.