Good morning,
We all know the pandemic changed how we work, but what we might not know is how the damage unleashed by COVID-19 continues to affect our labour market.
December’s blockbuster job numbers in Canada came as a surprise. The gain of 104,000 jobs beat economists’ expectations by a mile and increased speculation that the Bank of Canada would have to hike its rate again this month to further cool the economy and inflation. The unemployment rate fell to five per cent, one of the lowest readings on record.
But a closer look at the details reveals that not all is as it seems in Canada’s job market. Though employment is up more than 3 per cent since the beginning of the pandemic, working hours are up only 1.75 per cent, said CIBC economists Andrew Grantham and Karen Charbonneau in a recent report.
“The Bank of Canada should be careful about placing too much emphasis on the unemployment rate as a signpost of excess demand within the economy,” they said.
“The “health” of the Canadian labour market in the coming year will also be influenced by the evolution of COVID and other respiratory illnesses that we are currently facing.”
What has changed is that the hours that people actually work are well below pre-pandemic levels because of higher levels of absenteeism.
“Companies are getting less bang for their buck, or fewer hours actually worked per employee,” said the economists.
Employee sick days increased in 2022 because COVID-19 continues to circulate and other illnesses have re-emerged. The economists calculate that more than 0.4 more hours per employee were lost in the fourth quarter of 2022 compared to the average between 2017 and 2019.
At the same time, workers are using more of their vacation time, though this has still not reached pre-pandemic norms.
“If vacation time was not still running below pre-pandemic norms, lost hours due to sickness and family needs alone would be equivalent to requiring around 230,000 additional employees,” said the economists.
That means the actual supply of labour that the economy is getting from a 5 per cent jobless rate is “noticeably less” than it would have been before 2020. Because of the lost hours, the economy is currently getting labour supply equal to a 6 per cent jobless rate, pre-pandemic.
“If employees continue to normalize their use of vacation time, but time lost due to illness or family issues doesn’t improve, then labour supply would be equivalent to a 6.2 per cent unemployment rate pre-pandemic,” said the economists.
The shortfall in hours worked also helps explain the country’s high vacancy rates. The economists say their estimate of the hours lost because of illness or family matters would have raised job vacancies by 60,000 — about a quarter of the excess vacancies currently seen in the economy compared to pre-pandemic.
Sectors where the work can’t be done at home, such as education, manufacturing and construction, have been hit the hardest by this shortfall.
While education has always seen higher levels of absenteeism because of illness, that’s not been the case for manufacturing, construction and mining.
The additional paid sick leave also raises wage costs. CIBC estimates that these costs have increased by between 0.5 per cent and 0.9 per cent just from time paid to employees who are absent because of sickness or family matters.
And when employers have to hire more staff to cover for those who are away, it further tightens the labour market and increases wage pressures.
If the health situation improves dramatically in the spring, the vacancy rate could fall quickly and the unemployment rate could rise even if there is no change in demand, said the economists.
However, there is also the possibility that “COVID could represent a structural shift within the labour market,” they said.
Cold and flu seasons have historically had a significant impact on labour each year, and now COVID has been added to that mix.
“The good news is that this should largely represent a one-time lift to labour costs relative to the pre-pandemic normal,” said the economists. “As long as the health situation doesn’t become an even bigger constraint to supply, we should be able to see an easing of inflationary pressures without a large increase in the unemployment rate.”
