Acute labour shortages about to become chronic source of economic pain

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I began Postmedia’s series on Canada’s acute labour shortages with an essay on why the issue probably isn’t going away, no matter how many “recruiting festivals” employers host or signing bonuses they give out.

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That column was influenced by The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, a book by economists Charles Goodhart and Manoj Pradhan that was published during the pandemic in 2020. They contend that the relative economic stability of the previous few decades was mostly the result of a global glut of workers. Therefore, inflation was tame because the primary input cost of most goods and services — labour — was cheapened by oversupply, not because central bankers had discovered the secret formula for economic stability, finance ministers balanced their budgets, or executives invented just-in-time delivery.

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Goodhart and Pradhan predicted that wage growth would reaccelerate as Chinese workers started to retire alongside baby boomers in North America and Europe. The power balance in the labour market was destined to shift, as desperate companies fought over a shrinking pool of qualified workers. As a result, the next few decades would be quite unlike the previous few.

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The extraordinary recovery phase of the COVID recession made Goodhart and Pradhan look prophetic.

Statistics Canada counted a million unfilled positions in the second quarter, the most on record and double pre-pandemic levels. The unemployment rate dropped to about five per cent, the lowest since at least the mid-1970s. Heading into the summer, essentially anyone who wanted a job could have found one, assuming they had the skills to match the positions on offer, or were up for some manual labour.

Demographic forces are difficult to reverse, but the stakes are so high that it’s worth a try. The Canadian unit of Deloitte Touche Tohmatsu Ltd., the global auditing and consulting firm, estimates that all those unfilled positions represent the equivalent of more than $50 billion in lost economic output, a calculation based on applying gross domestic product per worker to the roughly 500,000 difference between current vacancies and the pre-pandemic average. “This is purely illustrative and likely represents the maximum potential cost to the economy, but it does drive home the point that labour scarcity and skills shortages could cost the economy tens of billions of dollars if left unaddressed,” Deloitte Canada said in a report published Sept. 29.

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Consider dog-treat maker Bosco and Roxy’s Inc., which recently signed deals with Walmart Inc.’s U.S., Canadian and online divisions. The London, Ont.-based company now needs to launch a third shift to move to seven-days-a-week production to keep up with orders. That means rounding up an additional 50 workers to complement its existing workforce of about 140. “We’re at risk of disappointing customers,” co-owner Jaymie Crook told the London Free Press. “Retailers need it at their stores by a certain date.”

It’s the same for Filtre Plus Inc., a ventilation company in Quebec City, which routinely turns away work because its current staff is maxed out. “I’ve always wanted to expand, but we’re at a point now where we don’t want to grow anymore because we don’t want to burn our people out,” chief executive Carl Bolduc told the Montreal Gazette. “Our problem is that we can’t find enough labour to meet the delivery deadlines set by the real estate promoters.”

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‘We search constantly’

Deloitte’s team of researchers, led by chief economist Craig Alexander, made one of the most thorough attempts yet to answer a question they said they get all the time from their clients in business and government: where did all the workers go?

Part of the response: nowhere. The participation rate of workers aged 25 to 54 climbed to record levels, and the total number of available workers — the total labour force plus respondents to Statistics Canada’s Labour Force Survey who say they would like to work, but aren’t actively seeking a job — has exceeded the number of vacancies throughout the pandemic. “In aggregate, Canada had enough workers,” the Deloitte report said. “This doesn’t mean that the labour shortages didn’t occur. It means that the problem was that the available workers weren’t where the jobs were (shortages by geography), weren’t in the occupations or industries that needed to hire, or the workers lacked the required skills.”

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Canadian employers have been lamenting a dearth of qualified candidates for years. The pandemic exposed the skills mismatch in dramatic fashion, especially in technology, manufacturing and transportation, as the unexpectedly strong recovery left companies scrambling to keep up with orders.

“We have been without a tool-and-die maker for two years,” Sheila Ficca, human resources manager at London, Ont.-based Means TransForm Products, a unit of Amsted Industries Inc., told the London Free Press. “We search constantly.”

The participation rate, which measures the percentage of people who are working or actively seeking employment, has been hovering around 65 per cent, down from around 66 per cent in 2019. That shift is roughly equivalent to about 300,000 jobs. The slide in participation appears to have something to do with psychology. The Great Resignation was more of a U.S. phenomenon, but there is enough anecdotal evidence to suggest the forced sabbaticals that came with pandemic lockdowns caused thousands of people to reflect on what they wanted out of life. In the oilpatch, for example, oil and gas companies have discovered lately that the pipeline of labour from the East Coast isn’t what it used to be. For the first time since the 1970s, it appears Maritimers have tired of goin’ down the road in search of work in Toronto and Alberta.

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“We haven’t had a big recruiting effort into the East Coast, as we’ve had, say, pre-recession years,” Duncan Au, chief executive of Calgary-based CWC Energy Services Corp., told the Edmonton Journal. “We continue to try and attract there, but we have heard from other competitors that their recruiting efforts there have gotten nada — they haven’t been successful.”

Boomers bow out

But the most important factor behind the job shortages appears to be the one Goodhart and Pradhan anticipated in 2020: mass retirement.

The Deloitte study shows that the drop in the participation rate since 2019 is mostly due to workers aged 55 and older exiting the workforce. Royal Bank of Canada economists Nathan Janzen and Claire Fan observed in July that if left unchecked, demographic trends will drop the participation rate to its lowest since the 1970s by the end of the current decade. Trevor Tombe, an associate professor of economics at the University of Calgary, said a further decline of the participation rate to 62 per cent by 2040 — which current trends predict — would reduce average annual GDP growth between now and then by 0.3 percentage points, the equivalent of $4,500 per person. “This is large. Very large,” Tombe wrote at The Hub, a policy and politics website. “It is the rising wave of retirements — rather than the not-so-Great Resignation — that deserves our attention.”

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The generational shift taking place in the labour force could bring some qualitative benefits, as generation Z appears to have little interest in courting burnout and other forms of job-related stress the way the all-work-and-no-play baby boomers did. A handover to a new crop of leaders might also be good for innovation. “Young people who are joining the workforce today will reach positions of influence much more quickly than in the past. That’s the most transformational element of the labour shortage,” Guy Cormier, chief executive of financial services co-operative Desjardins Group, told the Gazette. “They will influence society through their values. Look at how many young mayors there are across Quebec today. This is the kind of generational change that many companies are going to experience.”

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A tighter labour market also is creating opportunities for marginalized workers who tend to struggle to get off the sidelines when employers have an easier time recruiting. “I know many people who got jobs who were not able to find a job before,” Zeeshan A Zakaria, an independent software developer, told the Ottawa Citizen. Crook of Bosco and Roxy’s said the company has tapped international students at Fanshawe College, who are allowed to work 20 hours per week while they’re in Canada studying. “It’s a big part of how we fill the void,” she said.

And of course, when something is in short supply, its value increases. Average hourly wages increased 5.3 per cent in August from a year earlier, compared with an average gain of 2.8 per cent since the start of 1998, according to Statistics Canada data. “What’s happening right now is that if you are desperate enough, you’re just going to go steal hands from your competitor by giving them more money,” Au of CWC Energy Services said. “We saw that happen this past winter — guys were paying $7 an hour higher than what we were paying.”

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‘Sad to hear the stories’

Statistics Canada’s most recent data on job vacancies probably represents a peak, as inflation and higher interest rates have pushed the economy to the brink of recession, and maybe even over the edge, according to various Bay Street forecasters.

Abbis Mahmoud, president of Dreammind Group, which owns a handful of Ottawa restaurants, including The Waverley and Happy Fish, noticed a jump in applications in July, when inflation crested at an annual rate of about eight per cent, the fastest since the early 1980s.

“We’re getting a lot of people looking for a second job, a third job, asking for more hours,” Mahmoud told the Citizen at the time. At first, he was happy to have so many applications, but then he came to realize why so many people were suddenly looking for extra work. “I’m finding it a bit sad to hear the stories,” he said. “People want to come and work as a bartender or waitress because they’re so tapped that they can’t wait two weeks to get paid.”

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An economic downturn likely would relieve some of the pressure on the labour market; indeed, that’s part of Bank of Canada governor Tiff Macklem’s plan, as he’s said he sees elevated vacancy rates as evidence of “excess demand” that’s partly responsible for the inflation scare. Macklem intends to cool demand to the point that employers start taking down all those “help wanted” signs, but not so much that employers actually start firing people.

Experts such as Goodhart and Pradhan and the economists at Royal Bank of Canada and Deloitte are certain a post-pandemic recession would only bring temporary relief. True, demographic doomsters since Thomas Malthus have tended to underestimate human ingenuity. Malthus, who in the late 1700s predicted population growth would lead to famine, didn’t see the Industrial Revolution coming. Profit-seeking owners and executives whose pay is tied to performance dislike turning away orders. Some will invest in automation and other forms of innovation that allow their companies to do more with fewer workers.

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Counting on a productivity boom to offset an aging workforce would be a bold bet, especially in Canada, which is populated with risk-averse companies and investors that dislike sacrificing their short-term profit margins for longer term success: business investment on non-residential structures and machinery was four per cent below pre-pandemic levels at the start of 2022, and 20 per cent below peak levels in 2014, according to a recent Statistics Canada study.

Incentives such as higher wages and a more sophisticated approach to education and training would help address shortages in certain industries, but neither is a fix to the core problem of scarcity. There are ways to increase the size of the labour force, but politics will get in the way. We’re living longer, which means we could work longer, but we’ve been slow as a society to give governments a green light to raise the retirement age. As a result, Canada has been leaning on immigration, but there are political limits to that solution, too. Quebec Premier François Legault this week rejected calls from business to increase immigration, saying it would be “suicidal” for the French language, while cities such as Vancouver and Toronto face backlashes related to rising house prices.

That’s why labour shortages are about to become a chronic problem, rather than an acute one: we aren’t willing to do what it takes to solve it.

• Email: kcarmichael@postmedia.com | Twitter: CarmichaelKevin