OTTAWA—The Bank of Canada did not address a concept related to full employment in its March 6 interest rate announcement when discussing the weakening labour market.
The BoC’s primary goal is to return inflation to 2 percent, which last occurred in 2020. But it also has to support maximum sustainable employment (MSE), similar to the full employment aspect of the dual mandate of the U.S. Federal Reserve. It’s a level that’s not directly measurable.
The central bank used to provide an MSE chart in its quarterly monetary policy report, measuring several labour market indicators against historical ranges. But it hasn’t provided such analysis since last July.
“I think that there’s a choice there not to show it. The concept of a maximum employment—it’s a kind of a theory point,” David-Alexandre Brassard, chief economist at Chartered Professional Accountants of Canada, said in a March 6 interview.
Mr. Brassard said that almost all labour market indicators have deteriorated and some quite significantly.
“We were in a situation that the labour market was very overheated. You could see this across a whole range of measures. Labour supply issues, labour shortages were at very elevated levels. The wage growth accelerated sharply,” Bank of Canada Governor Tiff Macklem said in response to a question from The Epoch Times during the central bank’s March 6 press conference.
He added that 2 percent inflation and MSE go together. Mr. Macklem explained that this is due to the fact that if the economy is below full employment, inflation will be below target, and if the economy is above full employment, it creates upward pressure on wages and prices.
Mr. Brassard said another issue with MSE is that it changes over time, given shifts in the labour force such as more women and older people working. Other factors are the aging population and record immigration.
“My problem with that [MSE] vision is that we benchmark with the past,” Mr. Brassard said.
BoC Reform
The central bank’s mandate largely revolves around monetary policy, aiming to keep inflation low, stable, and predictable.Senator Diane Bellemare, a former economics professor at Université du Québec à Montréal, is pushing to ensure that full employment becomes part of the BoC’s mandate. Her current proposal is contained in Bill S-275—An Act to Amend the Bank of Canada Act.
In a Feb. 27 presentation at University of Ottawa’s Centre for International Policy Studies, Ms. Bellemare said that having full employment as a safeguard would prevent the BoC from raising interest rates too high.
“We should start to decrease the interest rate,” she told The Epoch Times.
“So the policy of raising interest rates … has damaged investment productivity, the capacity of the economy to cope with inflation in the long run,” she said during her presentation.
Ms. Bellemare questioned whether creating a recession in hopes of bringing inflation back to target is even constitutional. She added that Canada’s standard of living is decreasing and the country needs higher productivity.
“The main challenge is to invest to increase productivity, and if monetary policy counteracts all the initiatives we do, then we are in big trouble.”
Changing Landscape
In his opening statement on March 6, Mr. Macklem said the labour market “has come into better balance” and that, despite wage growth having been in the 4–5 percent range for a while, “there are now some signs that wage pressures may be easing.”The concern is that higher prices can fuel higher wages and vice versa—a wage-price spiral.
“We brought inflation down a lot without a recession, without a large increase in unemployment. The labour market adjustment has been relatively gradual, relatively smooth, and we moved from a very overheated market to a better balanced market,” Mr. Macklem responded to The Epoch Times.
The unemployment rate fell to 5.7 percent in January from 5.8 percent in December 2023, marking the first decline since December 2022. It had risen through most of 2023—from 5.0 percent in April to 5.8 percent in December.
Mr. Brassard noted that 5.7 percent is not bad historically.
But the January jobs report highlighted a trend of more public-sector and part-time work while businesses slowed their hiring.
“Labour demand has not been strong enough to absorb the international migration-led population boom, and there appears to be more underlying labour market slack than the higher unemployment rate suggests,” said Oxford Economist economist Callee Davis in a Feb. 29 note.
Holding Firm on Inflation
The Bank of Canada held its policy rate at 5 percent on March 6 and said it’s not considering cutting rates yet due to persistent underlying inflation pressures.In a March 5 note, CIBC economists said the BoC’s two official measures of core inflation—which attempt to better capture the underlying inflation trend by minimizing the more volatile items—are overstating the inflation rate.
The two January readings for the BoC’s measures of core inflation are 3.3 and 3.4 percent, whereas total inflation was 2.9 percent. CIBC says that simply excluding the more volatile items from the consumer price index would result in core inflation being between 2 and 3 percent.
“Not only is underlying inflation lower, it has progressed more materially over the past year in line with the weakening of the economy, suggesting that fears that inflation has been ‘stuck’ were off the mark,” according to CIBC.
Mr. Macklem said the central bank is comfortable with its preferred measures of core inflation and that there was a clear consensus among the Governing Council that now is not the time to cut rates.
