Joblessness seen falling to 6.2% without causing inflation

Canada's unemployment rate can head much lower before it triggers pressure on wages and worry about inflation, according to a new report from CIBC World Markets.

CIBC report says Bank of Canada won't need to worry about inflation from wages until 2015

A CIBC report says there is little inflationary pressure in Canada and the economy still has slack, meaning low interest rate policies can remain in place for some time. (Associated Press)

Canada's unemployment rate can head much lower before it triggers pressure on wages and worry about inflation, according to a new report from CIBC World Markets.

In 1999 and 2005, when the unemployment rate was 6.9 per cent – the same rate it is today – the Bank of Canada moved to raise interest rates because it was worried about inflation.

But CIBC chief economist Avery Shenfeld says changing demographics and changing government policies mean a 6.9 per cent unemployment rate is nowhere near “full employment.”

"Full employment ain't what it used to be, and that's good news for job seekers," Shenfeld said in a press release.

"Demographic and public policy changes in recent years have lowered the non-inflationary rate of unemployment. That will allow the Bank of Canada to keep rates low for long, and press ahead towards further labour market improvements."

Shenfeld expects the unemployment rate to fall to 6.2 per cent by 2015, but says the central bank will not be under pressure to raise rates despite a decline in joblessness. Low interest rates will help the economy grow in the intervening time, he said.

One reason for the low inflationary pressure is underemployment. There are 900,000 Canadians working part-time jobs because that’s all they can find. Any new jobs created will just open opportunities for them to get the full-time work they want, Shenfeld said.

Other reasons why the unemployment rate can go lower without pushing up wages:

  • More of the workforce is approaching retirement age.
  • Canadian workers have reduced bargaining power because fewer are protected by unions.
  • The share of the labour market that is between jobs or looking for their first job is in decline.
  • More immigrants arrive in Canada with a job offer in hand, in part because of government policies that require more language proficiency and job skills.
  • Tighter rules for unemployment eligibility now require Canadians to accept a wider range of employment.

Only 37 per cent Canada’s jobless are eligible for unemployment insurance in 2013, compared with 51 per cent in 2009, meaning the jobless are forced to move further afield or to accept jobs that do not make use of their skills.

Shenfeld says he expects the Bank of Canada will probably consider rate hikes in 2015, when unemployment is close to 6.2 per cent.

"All of this implies that the labour market has more room to run to lower unemployment rates before wage pressures threaten the Bank of Canada's two per cent CPI target,” he said.

Shenfeld said the absence of inflationary pressure today indicates that there still is slack in the Canadian economy. 


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