Key insights
- Bank of Canada official warns structural changes in the Canadian labor market (low turnover, rising long-term unemployment) may limit the effectiveness of rate cuts. Stimulating demand through lower rates could create inflationary pressures and delay necessary economic restructuring. This indirectly impacts US equities by potentially influencing Fed policy considerations and cross-border economic dynamics.
Investing.com -- Bank of Canada External Deputy Governor Nicolas Vincent said Tuesday the country’s labor market is undergoing structural change that will complicate monetary policy decisions.
In a speech in Montreal, Vincent highlighted three major trends in the job market that suggest it’s experiencing more than a short-term slowdown: low turnover, rising long-term unemployment and youth struggling to find work.
Vincent warned the central bank’s ability to help the economy during periods of structural change is limited, and that reducing rates could fuel inflationary pressures.
"While monetary policy can, to some extent, help the economy transition during periods of restructuring, it cannot compensate for lower supply caused by factors such as trade friction or population aging," Vincent said.
"Moreover, if we were to stimulate demand when the issue is more structural, we could create inflationary pressures while also delaying necessary restructuring in economy," he added.
Canada’s unemployment rate has remained between 6.5% and 7% over the past year as US tariffs impact the economy. Vincent said the aggregate data can mask key differences between temporary swings and longer-lasting changes.
One of the central shifts is a "low hire, low fire" labor market, where employers have avoided laying off workers even as they’re reluctant to hire. Vincent said this trend causes inertia in the job market.
"Low turnover is a sign that the labor market is less dynamic than it used to be. And this is not trivial: when it’s more dynamic, it’s better able to adapt to change. In a low hire-low fire labor market, there is a risk that the reallocation of workers from less productive sectors to more productive ones slows down," he said.
Vincent said population aging may be contributing to this trend, noting the Bank of Canada’s surveys found some businesses reporting difficulty replacing experienced workers and spending time training new hires.
While the jobless rate has remained steady, Vincent noted long-term unemployment has been rising. The share of unemployed people who have been looking for work for more than six months has reached its highest level since the early 2000s, outside of the Covid-19 pandemic years.
"From a structural perspective, a key factor appears to be the gap between the skills and experience workers have and the ones employers want," Vincent said. He added that job postings over the past two years have required more experience than ever before, while the share of people who have never worked has grown.
The slowdown in hiring has affected young people. After the jobless rate for people aged 15 to 24 reached a record low of 9% in 2022, it has climbed to above 14% four years later.
Vincent noted young people also make up nearly a quarter of the long-term unemployed, a share that has more than doubled since 2022.
The deputy governor said the surge in immigration between 2022 and 2024 likely contributed to this trend as the country experienced an influx of young people from abroad that intensified competition for entry-level jobs.
While the reduction in immigration since then should help, Vincent said, he pointed to the mismatch between employers’ needs and workers’ skills as another factor.
"Finally, AI is another plausible structural explanation," Vincent said, noting that entry-level jobs are at greatest risk of automation. He added it was too early to determine that AI was a major factor in youth unemployment.
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