Where did the Workers Go? Understanding Canada's Labour Shortages

In recent months, I have been connecting with business, institutional and government leaders across Canada to discuss the looming economic slowdown and possible recession – reflecting the fallout of high inflation and rapidly rising interest rates. While business cycle risks are acute, leaders have consistently indicated that their primary concern is not the economic outlook, but rather managing labour and skills shortages. Even if labour demand weakens in the near term, there is considerable speculation that labour scarcity will persist or will re-emerge as a dominant issue once the economy strengthens again. As a result, one of the most common questions I hear is: after the pandemic lockdowns, where did all the workers go?

The wording of this question is notable because it gives the sense that the pandemic caused a change in worker behaviour or labour supply. This fits with the narrative about the ‘The Great Resignation’ – a catch phrase used to capture the notion that vast numbers of workers left jobs or didn’t return to jobs during the pandemic. In some cases, workers changed jobs for health and safety reasons. For others, workers had time to rethink career or occupation choices and even had time to do some training or education. Then there were older workers that might have accelerated the timing of their retirement. However, there is another factor at work as well – increased labour demand also contributed to the labour scarcity being experienced. 

There have been many attempts to capture where workers have gone, but the majority focus on anecdotal stories of individuals. So, I worked with the Deloitte Economic Advisory team to create a paper that looked at the shifts in the various components of labour supply and labour demand.

The analysis led to a number of conclusions. First, it turns out that in contrast to the United States, aggregate labour demand in Canada did not exceed aggregate labour supply during the pandemic or recovery. This does not mean that there were not labour shortages, but it does mean that the shortages were by geography, by industry, by occupation and reflected skill mismatches. Second, a rough estimate is that the labour scarcity in 2022 was costing the economy as $54 billion in lost potential economic activity as measured by real GDP. Third, Canada’s labour supply declined during the pandemic and recovery due to a drop in labour participation of older workers age 55+. Meanwhile, labour participation of prime working age workers actually increased, a seemingly unnoticed story but the increase of these workers was not enough to offset the loss of older workers. Fourth, there were dramatic swings in employment by industry and occupation. Job creation since the start of the pandemic was dominated in services-producing sectors and in higher skill occupations. Professional services, finance, government, health, and education all added to payrolls. Certain industries, like accommodation and food services, were hard hit and slow to recover, and certain occupations, like sales, experienced the largest job declines. The job market story can be divided into two very different narratives. There are labour shortages in industries and occupations that have experienced strong growth and have needed more workers to expand. Then there are labour shortages in industries and occupations that experienced large declines during the pandemic but have struggled to replace workers during the recovery, particularly while health risks persist. Fifth, beyond the pandemic volatility, the Canadian labour market is heavily constrained by structural factors of an aging domestic population, barriers to success facing underutilized domestic pools of labour (e.g Indigenous and First Nations People, visible minorities, women, disabled Canadians etc.), and reliance on immigration for close to 100% of net labour force growth. The implication being that much of the underlying labour scarcity has a structural dimension.  

In Deloitte Canada’s Competitiveness Scorecard, human talent was assessed as Canada’s top competitive advantage; but, that advantage is lost if the supply is inadequate to meet the needs of the economy. It is essential that Canada makes optimal use of its available pool of domestic-born talent while attracting and integrating the best talent from abroad. At the same time, limited labour supply makes a strong case for increased investment in labour saving and productivity enhancing machinery and equipment. 

To read more, get the report here: https://bit.ly/3BXVnhU

Stay tuned for policy analysis in a follow-up piece that Deloitte is producing that will be released the week of October 9th.