Canada’s jobs report for May showed that the labour market continued to soften as the economy added 27,000 jobs and the unemployment rate inched up to 6.2%, a full percentage point up from a year earlier. The employment rate fell by 0.1 percentage point to 61.3%
While it’s still too early to say, the May jobs report paves the way for a possible July rate cut by the Bank of Canada.
The 25 basis-point reduction that was recently announced is not yet enough to move the needle on the cost of capital and, in turn, hiring. But it is a start, and with more rate cuts, hiring will pick up in the second half of the year.
The only data point that would give the Bank of Canada a pause is that average hourly wages rose by 5.1% on an annual basis in May. But in the new post-pandemic economy, one should not expect wage growth to return to the pre-pandemic range of 2% to 3% but instead settle at a higher level.
Jobs numbers can fluctuate from month to month, so it is helpful to look at the overall trend. While the April jobs report was a positive surprise, it proved to be an anomaly, and the May jobs report returned to trend. That weakening reinforces the view that employers are delaying hiring until the rate environment improves.
The signs of softening labour demand are plenty. Canada added 62,000 part-time jobs while shedding 36,000 full-time jobs.
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While some workers may choose to work part time, many do not do so voluntarily and are underemployed. Over the past year, part-time employment rose at a faster rate (3.8%) than full-time employment (1.6%).
The services-producing sector led the gain, more than offsetting the loss in the goods-producing sector. This is a consistent theme that has emerged over the past three years.
Employment rose in health care (30,000); finance, insurance, real estate, rental and leasing (29,000); and accommodation and food services (13,000).
Canada has been trying to add health care jobs to meet increasing demand from population growth and its aging population.
Over the past year, part-time employment rose at a faster rate (3.8%) than full-time employment (1.6%).
Construction had 30,000 fewer jobs, part of a trend consistent with the high interest rates as construction is rate sensitive. Transportation and warehousing also lost 21,000 jobs.
The unemployment rate is expected to rise slowly in the coming months. While a 25 basis-point reduction is a welcome sign that marks the start of the rate cut cycle, more cuts are needed for businesses to start hiring.
That said, the limits on temporary residents will keep population growth moderated and prevent the unemployment rate from rising too high in the fall.
There will be a smaller increase in the number of working-age people through immigration compared to the previous two years. Even though population growth will still rise faster than job growth, the unemployment rate is likely to peak at 6.4% this year.
