Canada's unemployment rate headed lower: CIBC

Absence of wage pressures means Bank of Canada will let economy run 
TORONTO, Nov. 7, 2013 /CNW/ - Demographic and policy changes mean Canada's 
unemployment rate has room to drop much further before we'll see pressure on 
wages that could trigger inflation, finds a new report from CIBC World Markets 
The report notes that historically, today's 6.9 per cent unemployment rate 
would already be generating wage and price pressures. In both 1999 and 2005, 
the Bank of Canada declared the economy had exhausted economic slack and 
reached full employment at essentially the very same jobless rate. In both 
cases, the Bank raised interest rates to cool the country's overheating 
"But full employment ain't what it used to be, and that's good news for job 
seekers," says Avery Shenfeld, Chief Economist at CIBC. "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." 
Mr. Shenfeld notes that, unlike the U.S., where millions of discouraged 
workers have given up searching for work and no longer count among the 
unemployed, discouraged workers excluded from the jobless count represent only 
0.1 per cent of Canada's working-age population. Those saying they want work 
but aren't in the labour force represent the same 2 per cent share that they 
did when the output gap was zero in 2005. 
While the participation rate has dropped, he adds that's solely due to 
shifting demographics, as a greater share of the population reaches retirement 
age. If the population shares of each age cohort are held constant, the 
participation rate would have been rising since the recession, as other than 
youth, each demographic group's participation rate has been steady or rising. 
"Underemployment is, however, a factor that has led to an understatement of 
labour market slack relative to the past cycle," says Mr. Shenfeld. "There are 
close to 900,000 Canadians working part-time because that's all they can get, 
rather than by choice. That's a half-percentage-point larger as a share of the 
workforce than when the economy had full employment in 2005. The additional 
hours they could offer up provides a cushion against wage and price pressures." 
Canada's degree of "frictional unemployment", the inevitable share of the 
labour market that will, even in a healthy economy, be between jobs or looking 
for their first job at any point in time, is also contributing to a lower 
jobless rate. This unemployment category has been in decline and the rate is 
already lower than at points in 1999 and 2005 when the output gap was zero. 
Changes in government policy are a factor in the reduced level of frictional 
unemployment. "New immigration rules are focussed on tilting the mix of new 
Canadians towards those with targeted skills and stronger language 
proficiency," notes Mr. Shenfeld. "Those coming in under the Provincial 
Nominee Program, focussed largely on job-ready individuals who cross the 
border with a job offer in hand, represent 13 per cent of new permanent 
residents, up from only 2 per cent in 2005. 
Tighter rules for unemployment eligibility now require Canadians to accept a 
wider range of employment offers rather than continue to search for a job 
that's either higher paying or closer to home. EI recipients now represent 37 
per cent of unemployed in Canada, down from 51 per cent in 2009 and an average 
of 47 per cent in the ten years prior to the last recession. 
Mr. Shenfeld also suspects declining unionization coverage could also be a 
modest factor by reducing worker bargaining power, particularly as Canadian 
workers now compete with "right to work" states south of the border. He notes 
that this could reduce the wage inflation pace at any given level of 
"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 2 per 
cent CPI target. Add to that some other factors putting downward pressure on 
CPI and there are reasons for the Bank of Canada to eschew rate hikes until 
early 2015. 
"By that point, we expect Canada's unemployment rate to be in the vicinity of 
6.2 per cent, well below what had previously been the Bank of Canada's comfort 
The complete CIBC World Markets report is available at: 
CIBC's wholesale banking business provides a range of integrated credit and 
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Avery Shenfeld, Chief Economist, at 416-594-7356,; or 
Kevin Dove, Communications and Public Affairs at 
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CO: CIBC World Markets
ST: Ontario
-0- Nov/07/2013 12:22 GMT
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