Labour Shortages and Rising Wages in Canada

Will businesses finally get a break from labour shortages and rising wages?

Some economic indicators suggest that labour market conditions have eased in recent months. If this is the case, it should be easier for businesses to find workers and pressure for higher wages should finally moderate. However, the national unemployment rate has remained stuck at 5.0% for most of 2023—a historically low level. So, are better labour conditions really in the cards for Canadian entrepreneurs?

Is Canada’s great labour crunch coming to an end?

Job creation in Canada continues to be very strong. In the space of a year, 365,000 new jobs were added in the economy while the country’s active population of workers—people able and available to work—increased by over 380,000. The result was a low unemployment rate. It hit 5.0% and stayed there in most of 2023. It recently ticked slightly higher in May but remains low by historical standards, at 5.2%.

Despite the solid job gains and an increase in the number of potential workers, many companies are still struggling to fill positions. According to the Bank of Canada’s latest survey, businesses continue to report labour shortages as the second most important challenge they face, after rising costs.

However, this is the first time in over two years that the labour shortage intensity indicator has been negative. This means that companies consider the current situation to be better than a year ago and that it’s easier to hire the workers they need.

There are other recent signs indicating the labour market is loosening up. For example, job vacancies have fallen by around 20% since last spring. Regardless, openings remain significantly high and nearly three out of five small and medium-sized businesses said in a recent BDC survey that they were still having difficulty hiring skilled workers.

This mixed picture suggests the labour situation has improved but remains challenging for many companies.

Can record population growth help?

In the first quarter of the year, Canada’s population grew at its fastest rate ever and, in the fall, Ottawa announced new immigration targets that would see the country welcome 500,000 immigrants a year by 2025. This will no doubt help companies find workers, but the situation is more complex than it appears.

According to a recent Statistics Canada report, labour shortages vary widely according to the level of education or skill required for the job.

For jobs requiring higher education levels, there seems to be an ample supply of workers. Of course, not all diploma and training are equivalent on the job market and therefore do not meet the same needs. However, the situation is reversed for low-skill jobs. Here, there are far fewer unemployed people than vacancies for jobs that require a high school diploma or less. Indeed, even if all the available workers in that category had been instantly hired in the fourth quarter of 2022, there still would have been over 130,000 vacancies.

In the fourth quarter of 2022, 497,000 job vacancies required a high school diploma or less, but only 70,000 unemployed immigrants had this level of education. Meanwhile, job vacancies requiring a university degree numbered 113,000—10,000 fewer than the number of unemployed immigrants with these qualifications.

Geographical factors or working conditions partly explain the shortage, but the figures nevertheless show an imbalance between the skills of available workers and market needs in the country.

Is raising wages a solution?

While wage growth in Canada was tepid before the pandemic, many companies have boosted salaries since the economy reopened to remain competitive in recruiting workers. The latest national employment report showed that the national average hourly wage rose by 5.1% year-over-year in May.

Going forward, companies that are losing experienced workers to retirement, or whose training and recruitment costs are high, may want to continue offering larger compensation packages to find the right workers for their long-term needs.

However, for businesses whose workforce is less specialized or prone to high turnover, further wage increases could add undue cost pressure in an uncertain economic context.

Overall, although there is some easing of labour market pressures, it is still not a generalized situation. The sector of activity and the skill requirements of each businesses will have a greater impact on the best suited strategy to help mitigate labour issues—including salary increases.

What does this mean for your business?

The labour problems companies have been facing for the past few years will not go away entirely but the situation seems less alarming. The forecasted economic slowdown should help lift off some of the wage pressure you have been facing recently.
While uncertainty remain high, not all sectors or regions are facing the same hiring challenges. Try to anticipate workforce issues specific to your business and prepare accordingly. For example, Technology investments can help you automate tasks, but you’ll probably need a specific type of worker to operate the systems and this kind of transition takes time.
Raising wages may be a short-term solution, but managing operating costs is already a challenge for many companies today. A good response is to improve your operational efficiency to reduce costs and maximize profits.

Source: https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/publications/monthly-economic-letter/2306