Impressive job growth hides an ugly truth

Trend helps explain the disappointing pace of income and GDP growth in Canada, says report

Mario ToneguzziThe disconnect between the Canadian jobs market and the economy in general and income growth in particular, is defining the current cycle, says a report released on Thursday by CIBC.

Lower Job Quality Curbing Income Growth, by bank economist Benjamin Tal, said the labour market continues to create jobs at an impressive pace, with the unemployment rate at its lowest since the 1970s.

“At the same time, real GDP growth, while expected to improve during the year, is not remotely close to where it should be given the headline employment numbers. The long-term correlation between job creation and income growth in Canada is on a downward trajectory,” said Tal.

“Clearly, it appears those new jobs do not add much to the nation’s overall productive capacity. This disconnect can be explained, at least in part, by the continued weakness of employment quality in Canada. Our index of employment quality fell by 1.4 per cent during the year ending May 2019 – building on the downward trajectory seen since the 1990s.”

Benjamin Tal
Benjamin Tal

The report said the reality of a lower level of quality also plays a role in explaining the disappointing pace of income growth in Canada.

“Note that in the late 1980s, when our measure of employment quality was 15 per cent higher, a one per cent increase in employment generated on average, a 4.4 per cent increase in real labour income. Today, it generates less than a three per cent increase in real labour income,” added Tal.

Over the past year, full-time employment rose much faster than part-time, accounting for 81 per cent of all jobs created. Ditto for paid employment, which rose by no less than 2.5 per cent over the past year – notably faster than the pace seen in self employment, explained the report.

“This means that the decline in employment quality over the past year is due to the composition of job creation by industry. Looking at the distribution of job creation by compensation over the year ending May 2019 reveals that the number of low-paying, full-time jobs rose very strongly relative to mid-paying jobs, with the weakest performance seen among high-paying industries. The worsening composition of the compensation subindex reflects strong growth rates in relatively low-paying sectors such as food services, accommodation, personal services, administration and personal care as well as non-store retailing,” said Tal.

“The recent softening in the quality index might suggest that, when it comes to job quality, the labour market might be a victim of its own success. Given the high labour market participation rate and the low unemployment rate, it is possible that the new entrants into the labour market represent a group of people who, in the past, would have probably stayed out of the labour market. In that context, one might claim that the decline in the quality of employment is not such a bad news story. Another possibility is that Canadian workers simply do not have the necessary skills needed by firms.

“To the extent that Canadian companies cannot find the right people and have to compromise on less qualified workers, the overall quality of employment suffers. The inability of the labour market to close the quality gap is also due to a slow increase in the number of high-paying jobs. And it seems that the supply of high-paying jobs is not rising fast enough to meet growing demand, as reflected in the relatively fast pace of wage gains in high-paying sectors.”

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