Saying the Quiet Bits Out Loud: Bank of Canada Aims to Raise Unemployment

It will seem irrational to most Canadians, but the surprising truth is that the Bank of Canada is explicitly trying to increase unemployment. The Bank’s Governor Tiff Macklem recently claimed that the unemployment rate in Canada was too low: “unsustainable,” in his words, and must be increased by using high interest rates to slow down economic activity and reduce employment. This idea – of using unemployment as a deliberate tool to undermine wages and protect business profit margins – has been implicit within orthodox monetary policy for many years. But it’s both rare and angering to hear that made explicit as the goal of economic policy.

In this commentary, originally published in the Toronto Star, Centre for Future Work Director challenges the idea there is ‘too much’ employment in Canada. To the contrary, the economy is still held back by problems in the supply of goods and services in the wake of the global COVID pandemic and other disruptions. Throwing hundreds of thousands of Canadians out of work (not to mention discouraging new investments in capital and capacity with higher interest rates and a feared recession) will make those problems worse, not better.

Upside Down Economics

By Jim Stanford

Eight months of rising interest rates have not yet noticeably cooled Canadian inflation. According to Statistics Canada’s latest survey, inflation was stuck at 6.9% in October. This isn’t surprising, since post-pandemic inflation has little to do with things the Bank of Canada can control. It’s mostly caused by global and supply-side problems (pandemic lockdowns, droughts and floods, war in Ukraine) – things which aren’t affected by interest rates. But the Bank of Canada persists with its tightening, hoping to shrink domestic demand enough to offset inflation from those supply shocks.

Meanwhile, Statistics Canada’s latest labour market report showed that despite higher rates, Canada added 108,000 new jobs in October: all full-time, and most in the private sector. Normally this would be cause for celebration. After all, having more Canadians working, producing, earning, and paying taxes is the driver of prosperity. Instead, it elicited furrowed brows and statements of concern from many quarters.

Why? Because according to the conventional narrative, more employment means more labour market “overheating,” more wages, more purchasing power, and thus more inflation. In this worldview, good news has become bad news. More work and wages is a problem. And suppressing employment is the path to salvation.

Just days after that bullish jobs report, Bank of Canada Governor Tiff Macklem endorsed this upside-down view in a speech in Toronto. He elaborated his theory that current inflation is the result of an overheated labour market, “unsustainable” low unemployment, and rising wages.

This theory isn’t actually new. For decades, conventional monetary policy has argued that maintaining a significant level of unemployment is good for the economy: it restrains wage demands, keeps workers hungry and disciplined, and protects business profit margins. This theory has gone by various names. Milton Friedman called it the “natural” rate of unemployment. Later it was renamed the “non-accelerating inflation rate of unemployment” (NAIRU). A century earlier, Karl Marx had called it the “reserve army of labour.”

Whatever it’s called, the theory recommends deliberately maintaining unemployment high enough to keep workers and wages in line. The implication, usually unstated, is that more than a million Canadians must remain unemployed at all times. Now Mr. Macklem has said the quiet part out loud: unemployment must increase, and he’s going to make it happen.

Ironically, just last year, the federal government and the Bank of Canada agreed on a new policy framework that seemed to herald a different approach. The Bank would pursue “maximum sustainable employment” alongside stable inflation. This should have led to a more balanced response by the Bank to current inflation, requiring it to consider jobs as well as prices.

But Mr. Macklem’s remarks last week, and the Bank’s actions all year, indicate those words are purely symbolic. In his Toronto speech, Mr. Macklem claimed maximum sustainable employment cannot be observed; we only know we’re below it, if inflation is too high. In other words, the phrase is just another euphemism for the NAIRU. The Bank will continue to act as if labour costs are the central cause of inflation, and lift unemployment as high as necessary to get inflation back to its 2% target.

Never mind that newly employed Canadians produce goods and services that they and other Canadians can buy with those additional wages. Never mind that there’s no evidence wages are fueling inflation: real wages have been falling, and workers’ share of GDP has shrunk. It’s profits that have surged to record levels, not wages. But the word ‘profit’ didn’t appear once in Mr. Macklem’s 3750-word speech.

It’s cruelly perverse to suggest that our biggest economic problem is that too many Canadians are working. To the contrary, there is so much work still to do in Canada: from staffing better emergency rooms to building affordable housing to expanding green energy systems. There are 1.1 million officially unemployed, and many more who could work but aren’t counted in those statistics. Instead of putting them to work producing the things we need, the Bank of Canada is literally trying to throw hundreds of thousands of others out of existing jobs.

The genuine meaning of “maximum sustainable employment” is an economy in which every willing Canadian can quickly find decent, stable work. We should turn economics right side up, and make that the central goal of macroeconomic policy.