Canada’s strong labour market hit a bump in the road in May, shedding jobs for the first time in nine months, with losses concentrated among young workers.
Total employment fell by 17,300, while the unemployment rate ticked up to 5.2 per cent, Statistics Canada said Friday. Analysts were expecting the economy to add around 23,000 jobs last month.
The report comes two days after the Bank of Canada raised interest rates for the first time since January, partly in response to concerns about labour market tightness, which is pushing up wages and feeding through into service-price inflation.
“The Bank of Canada couldn’t have seen this coming when it decided to surprise markets with a 25 basis point rate hike on Wednesday,” James Orlando, senior economist with Toronto-Dominion Bank, wrote in a note to clients. “While one weak labour market report doesn’t make a trend, the BoC will be closely watching to see if other cracks start to form.”
Canada’s job market has been on a tear since last summer, with employers adding more than 400,000 positions and unemployment hovering near a record low, month after month. That’s despite the most aggressive monetary policy tightening campaign in decades, in which the Bank of Canada increased its benchmark interest rate eight times between March, 2022, and January, 2023.
Analysts cautioned against reading too much into one Labour Force Survey report, which can be volatile month to month. But some suggested that the weakness in the May data show higher interest rates are starting to have their intended effect.
“It’s a pretty weak report across the board. We saw weakness in hours worked, and when you look at that variable that doesn’t really bode well for the second quarter for GDP growth,” Stephen Tapp, chief economist at the Canadian Chamber of Commerce, said in an interview.
“We know vacancy and job postings are still quite elevated relative to the pandemic. But this is clearly a sign that the big hiring binge that we had at the start of the year is over and momentum is slowing,” he said.
Employment fell most for youth, aged 15 to 24, declining by 77,000 positions. That indicated a slow start to the summer job season for young people and students, Statscan said. This was partly offset by an increase of 63,000 jobs for people aged 25 to 54.
Job losses were concentrated in the service sector, where overall employment fell by 40,000. By contrast, employment in goods-producing industries rose by 23,000, with a notable uptick in manufacturing jobs.
Despite the drop in employment, there are still signs of tightness in the labour market. Average hourly wages rose 5.1 per cent on a yearly basis – down slightly from April, but still strong from a historical perspective.
The pace of wage increases is a particular concern for the Bank of Canada, given the impact on service-sector prices. Central bank officials have argued that inflation won’t fall back to the bank’s 2-per-cent target unless wage growth slows or worker productivity picks up considerably.
“With much of the weakness in employment driven by the youth category, which can be volatile at this time of year, and with wage growth continuing to run strong, [central bank] policymakers may still need to see further signs of softening ahead to prevent a follow-up interest rate hike,” Andrew Grantham, senior economist with Canadian Imperial Bank of Commerce, wrote in a note to clients.
In its rate announcement on Wednesday, the Bank of Canada cited the tightness of the labour market as one of the reasons it raised rates again. It said that rising immigration and worker participation rates are adding much-needed labour supply, but that these new workers are being hired quickly, suggesting the economy remains in a state of “excess demand.”
Deputy governor Paul Beaudry said in a Thursday speech that the central bank hiked rates largely in response to surprisingly strong consumer spending data and worrying signs that the downward trend in inflation has begun to stall. He said that the “very vigorous labour market” may be one reason that interest rate increases have not dampened consumer spending as much as many economists anticipated.