Employment & Unemployment,  Research,  Wages

Interrogating the Labour Shortage Hypothesis

Testimony to the Standing Senate Committee on Social Affairs, Science and Technology, October 4, 2023


Canada’s Senate is investigating temporary migrant labour programs in Canada, which have expanded rapidly in the last two years, and their impact on labour markets and other issues. The Centre for Future Work’s Jim Stanford was invited to provide testimony on the issue of whether a purported “labour shortage” necessitates increased temporary migration inflows to Canada. Here is an annotated transcript of his testimony.

Senators, thank you very much for the invitation to join you today. 

I want to stress at the outset that my expertise relevant to your inquiry is as a labour economist. I have some high-level understanding of the implications of immigration policy for labour supply and demand trends and analysis, but I’m not an expert on immigration policy per se. I will limit my remarks and contributions to the issues around labour market balances and imbalances, and how they provide a context for immigration policy.

In particular, I want to directly and forcefully challenge the assumption that Canada has faced and continues to face a so-called labour shortage. We have heard that argument from employers and employer organizations for years, even before the pandemic. Employers from certain sectors – like retail, hospitality, and the small business sector – complain loudly that they cannot find enough workers to do the jobs that they are advertising at the wages that they are offering. Many different reasons have been advanced or hypothesized for this alleged labour shortage, including:

    • demographic change and the aging society
    • the idea that consumer spending and aggregate demand in Canada is overheated and excess relative to our productive capacities
    • even a lack of work ethic or commitment on the part of individual workers; perhaps because they have become lazy and accustomed to public income support.

I think that all of those assertions are wrong. The policy implications that have been advanced by those accepting the labour shortage hypothesis have also ranged widely, including:

    • reductions in income support programs to reinforce the supposed incentive to work
    • deferment of the retirement age to keep people in the labour force for longer in their lives
    • efforts to curtail labour demand through higher interest rates or other forms of demand suppression (which have indeed increased unemployment in the last year, as a result of policices from the Bank of Canada)
    • especially relevant for this inquiry, there have been calls from business to open up immigration flows to Canada, particularly through the various temporary permit channels for temporary work or temporary work and study.

I think the labour shortage hypothesis is wrong and, therefore, its implications for immigration policy are also wrong. Far from being inadequate, the labour force in Canada has continued to grow. In fact, the growth of the labour supply in Canada has accelerated in the period since the pandemic, mostly because of liberalized immigration flows (particularly those temporary permits that we discussed).

As shown by the first red circle in Figure 1, labour force growth did slow notably in Canada during the 1990s. Far from causing a “labour shortage”, however, this weak labour force growth was itself a response to persistent unemployment and underemployment during that time (that is, to weak labour demand). This suppressed labour force participation. Later, labour force growth recovered as the economy strengthened in the 2000s.

Labour force growth line graph
Figure 1

The COVID pandemic, of course, had a devastating impact on labour markets, including causing an unprecedented drop-off in labour supply (the second red circle in Figure 1) – as workers stayed at home to avoid infection, supported by the CERB program and other emergency measures. That impact was short-lived, however, and labour supply quickly regained and then surpassed its pre-pandemic peak. Now over the last year, the labour force has grown at an annual rate of almost 3% (third red circle in Figure 1) – its fastest growth (other than the post-pandemic rebound) in decades.

Overall labour force participation has remained remarkably stable in Canada over recent decades, despite the demographic aging of society (Figure 2). Participation for the whole working age population, defined as those over 15, continues to hover above 65%, and has fully recovered after the pandemic. In the core working age population, between 24 and 55, labour force participation is at record highs.

Labour Force Participation line graph
Figure 2

One of the reasons overall labour force participation has remained so strong is the growing labour force participation of older workers. Beginning around the turn of the century, labour force participation by those over 55 has grown strongly. It now rests between 35% and 40% of all of those over aged 55 (Figure 3). So the simplistic claim that labour supply will shrink because Canadians are getting older is quite wrong.

Older worker participation line graph
Figure 3

Indeed, contrary to the assumption that the population is getting older and that’s why we’re running out of workers, the fastest growth in a working-age population cohort that we’ve experienced in Canada in recent years has been among younger workers. We’ve seen the population of 15- to 24-year-olds grow by over 4% in the last year, compared to 2.5% for the over-15 working age population in total (Figure 4). This means that, on a net basis, Canada’s working age population is becoming younger, not older.

Population growth by age bar graph
Figure 4

The claim that there’s a labour shortage is also contradicted by the behaviour of wage trends in Canada. We’ve seen a decline in real wages, on average, in Canada since the reopening of the economy after the pandemic, in large part because of the inflation surge at that time. As indicated in Figure 5, real wages spiked temporarily during the lockdowns: this was a statistical anomaly resulting from a composition effect, whereby the disemployment of so many lower-wage workers in retrial, hospitality, and personal service industries (closed during the lockdowns) resulted in an artificial increase in the average wage for those who were left working. 

Real wage erosion line graph
Figure 5

That temporary effect disappeared after those industries reopened. Then real wages began to decline as post-pandemic inflation broke out; average real wages are now 3% lower than in mid-2021 (and even further below their pre-pandemic trend). If something were genuinely in short supply, it should become more expensive – not less expensive.

Significant unemployment continues to exist in Canada, again in contradiction to the assumption that we are in a position of excess employment. The official unemployment rate is 5.5%, which translates into 1.2 million unemployed Canadians. That’s a significant increase since last July, up by 170,000 people. That alone is evidence we’re a long way away from full employment or a true labour shortage.

Moreover, that official unemployment number understates the true underutilization of labour in our labour market. If we included underemployment, involuntary part-time work, and those who have a desire to work but are not ticking all the boxes that Statistics Canada requires in order to be qualified as officially unemployed (including the requirement for ongoing active job search), that number would be much bigger: closer to 3 million, in my estimation.

The whole concept of labour shortage, in my judgment, is an upside-down idea and reflects a very employer-centric view of the world. In fact, economic policy should prioritize full employment as a central macroeconomic goal.

But in a condition of genuine full employment, whereby anyone who wanted to work could find a decent job and find it quickly, employers would complain bitterly about a labour shortage. What makes it easier for workers to find and choose suitable work, implies greater challenges for employers in recruiting and retaining labour. Employers prefer a situation where they can advertise a position and get many willing and qualified applications the next day, some of them offering to work for less than the advertised wage. That is the desire of employers, and that’s one reason why employers have called for measures, including liberalized temporary immigration, in order to recreate a situation that is more to their liking. We can see their wishes being fulfilled today; we see rising unemployment in general, but in particular cohorts of the labour market, we see large numbers of desperate people lining up to take low-wage jobs at places like Wal-Mart. 

Relaxing the labour supply constraint on employers dissipates the pressure they would otherwise face to lift wages, improve benefits and job stability, and implement productivity-enhancing technological change. Acceding to employer demands to “get us more workers,” whether through exploitive measures like temporary migration work permit programs or other policy favours (like deferring retirement or cutting income support programs) undermines the goals of improving job quality and equity.

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.