Is Canada s labour market in transition?

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Dwight Allison
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1 October 27, 215 Is s labour market in transition? On October 21 st, the Bank of (BoC) kept its overnight rate target at.5%. One of the key factors underlying the BoC decision to stay put on monetary easing is the realisation of complex adjustments (that) will take considerable time 1. Broadly speaking, these adjustments consist of a rebalancing of economic growth from commodity-oriented Alberta, Saskatchewan and N&L to whatused-to-be manufacturing hub Central. By looking at some specific labour market and demographic indicators, this Monitor assesses whether if s economy is actually in transition, following two divergent economic paths. Indeed, changes in the poles of job creation, the unemployment rates and the number of job vacancies reveal that some adjustments are taking place and that difficulties encountered in some provinces seem to be offset by improvements occurring in others. Also, stemming from this shift in opportunities across provincial labour markets is a forthcoming transfer in interprovincial migration, whereby flows of workers previously looking for job opportunities in Alberta are now expected to move to another province or to return closer to their hometown, where job opportunities are gradually becoming more abundant. More full-time Jobs Since June 214, when oil prices reached a summit, the Canadian labour market performed relatively well, as a total of 27K net new jobs were created. In a way, this implies that, despite the oil shock, improvements in some parts of the country outweighed the economic deterioration elsewhere. Two recent labour market trends reinforce this view. First, the employment growth since June of last year exclusively consists of full-time jobs as part-time employment tumbled (figure 1). Since full-time positions provide a steadier and higher income, the net creation of more than 2K such jobs since June 214 sends a signal that contradicts doomsayers. Second, the decline in part-time employment (PT) since late-214 is mostly explained by a fall in the number of involuntary part-time workers (figure 2). This can be interpreted as a positive labour market development since part-time workers interested into working longer hours are considered underemployed Figure 1 - Employment in (Millions, 3 month moving-average) Full-time (LHS) Part-time (RHS) Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Source: Statistics, LBS Economic Research and Strategy Figure 2 - Involuntary Part-time Workers 's % Invol. PT workers (12m mov. Avg, 23 7 LHS) 22 Invol. PT workers as a share of 65 total PT (12m mov. Avg, RHS) Source: Sources: Statistics Statistique,, LBS VMBL Economic Recherche Research économique and Strategy et stratégie Important Regional Changes in the Canadian Labour Market Still, it is by identifying where those full-time positions were created that s economic growth s transition starts to appear. The vast majority of full-time employment gains since June 214 came from Ontario, Québec and British Columbia (figure 3) Bank of, October 215 Monetary Policy Report 1

Compared to the four years prior to the oil shock, Quebec and BC s average monthly growth in full-time employment significantly increased while Ontario s stayed roughly the same 2 (figure 4).

2 Compared to the four years prior to the oil shock, Quebec and BC s average monthly growth in full-time employment significantly increased while Ontario s stayed roughly the same 2 (figure 4). In contrast, during the period, when crude oil prices were elevated, Alberta and Saskatchewan were the main engines of fulltime job creation. However, since June 214, employment creation in these provinces came to a halt. 's Figure 3 - Full-time Employment in Cumulative Change, June 214 to Sept. 215 Atlantic QC ON MB SK AB BC Source: Statistics, LBS Economic Research and Strategy.3%.25%.2%.15%.1%.5%.% -.5% -.1% Figure 4 - Change in Full-time Positions in (%, m/m) Av. (June June 214) Av. (July 14 - Sept. 15) Atlantic QC ON MB SK AB BC Source: Statistics, LBS Economic Research and Strategy One disappointment that needs to be mentioned is the absence of new manufacturing jobs. In Ontario, a large number of new positions were created in the construction industry and the finance, insurance, real estate and leasing industry and are mainly driven by an increase in multifamily dwelling housing starts in the last year. In Quebec, most net job creation comes from the services industry. Only B.C. saw a significant net job creation in the manufacturing sector since June 214 (+11K). It appears that external demand will need to accelerate much further for industrial capacity utilization to increase and manufacturers to hire aggressively. That being said, we analyse further by looking at recent labour market trends in major metropolitan areas. Table 1 below shows the evolution of the unemployment rate in most major metropolitan areas since June 214. On the table, the state of the labour market, based on the regional unemployment rate, is described on a green (healthy) to red (weak) scale. A few observations follow. First, the unemployment rate in major western cities is increasing. While it is still very low in Regina (4.3%), the level that now prevails in Saskatoon (5.8%), Edmonton (5.7%) and Calgary (6.7%) is significantly higher than at the beginning of the summer of 214. In contrast, Ontario s populous metropolitan areas are undoubtedly gaining traction. For instance, Hamilton, Toronto and London are all experiencing a fall in unemployment coupled with either stagnation (Hamilton, Toronto) or improvements (London) in labour market participation. This means that the fall in the unemployment rate in those cities can be attributed to stronger job creation rather than simply a lower number of people looking for work. The situation is somewhat different in the province of Quebec. While in Montreal the unemployment rate increased due to stronger labour market participation, job gains in Québec City outpaced the increase of its labour force, making the labour market there one of the tightest across. Finally, of note, the unemployment rate in British Columbia s two main metropolitan areas is still relatively low and stable. The economic slowdown in China, where BC exports a significant amount of commodities, hasn t had yet an impact on those cities labour market. 2 Of note, Nova Scotia and Manitoba average full-time employment growth also increased since the oil shock. October 27, 215 2

3 Table 1 - Unemployment Rate - Census Metropolitan Areas 3-Month Moving Average Since Oil Peak June 214 September 215 Regina 3.6 Regina 4.3 Saskatoon 4.2 Saskatoon 5.8 Edmonton 5.3 Edmonton 5.7 Calgary 5.4 Calgary 6.7 Québec 5.4 Québec 4.6 Victoria 5.5 Victoria 5.4 Vancouver 5.7 Vancouver 5.8 Halifax 5.8 Halifax 5.9 Winnipeg 5.8 Winnipeg 5.8 Hamilton 6.3 Hamilton 5.3 Kitchener 6.9 Kitchener Ottawa 6.9 Ottawa 6.2 London 7.6 London 6.7 Sherbrooke 7.8 Sherbrooke 7. Toronto 7.8 Toronto 6.7 Montréal 8.2 Montréal 8.8 Windsor 9.1 Windsor 9.1 Source: Statistics, LBS Economic Research and Strategy Another way to look at the ongoing adjustments in the Canadian economy is through job vacancies. Indeed, as companies in Alberta, directly and indirectly involved in the resource extraction industry go through restructuration and consolidation, fewer jobs are available in the Wild Rose Country (figure 5). At 34K, the current level of vacant jobs available is the lowest on record; and down considerably from a year ago 3. Additionally, the fact that the decline in the number of available position is broad based across sectors supports the view that the economy is in recession this year (we forecast Alberta s real GDP to contract by -.5% in 215). On the contrary, job vacancies in Ontario, Québec and British Columbia are on the rise since mid In the case of Ontario, vacancies almost reached an all-time high in June 215, climbing to 88K. This is a staggering improvement considering that, in early 212, the number of job openings in Alberta was almost as high as Ontario s. Altogether, those important variations in a little more than a year are evidence that s labour market is rebalancing itself. Figure 5 - Job Vacancies 3 month moving average - In Thousands 1 9 Ontario Québec 5 4 B.C. 3 Alberta 2 1 May-211 Dec-211 Jul-212 Feb-213 Sep-213 Apr-214 Nov-214 Jun-215 Source: Statistics, LBS Economic Research and Strategy The case for a shift in interprovincial migration A delayed, but perhaps significant evidence of regional economic growth rebalancing is labour mobility. It is well illustrated by interprovincial migration flows. Changes in such flows should come as a natural response to regional shifts in labour market opportunities. It is an economy s desirable characteristic as it allows a better and quicker match between qualified workers and available employment. Since 1995, the oil-rich Alberta has experienced almost continuous positive net interprovincial migration and the development of the energy sector in the province played a major role in the phenomenon. Indeed, Alberta is, along with BC, one of only two Canadian provinces which has consistently, and is still today, enjoying positive interprovincial migration. For the last two decades, workers from most other provinces seeking opportunities moved to Alberta attracted by its enticing labour market conditions, higher wages and stronger wage growth (figure below). Since early 215, wage growth has been higher in the Rest of than Alberta, a phenomenon that could mark the starting point of a shift in interprovincial migration patterns Figure 6 - Average Weekly Earnings (y/y % change, quarterly data) Alberta 2 3 Job vacancies are only available since early Source: Statistics, LBS Economic Research and Strategy October 27, 215 3

4 Another proxy for changes in interprovincial trends is the variation in provincial unemployment gaps with the Alberta. The figures below picture two correlated variables: the annual change in the unemployment rate in Alberta relative to the unemployment rate in three Canadian provinces (B.C., Ontario and Quebec) and the annual change in the net flow of interprovincial migrants of one of these provinces versus Alberta. As one can notice, when the unemployment rate increases in Alberta relative to that of a specific province, interprovincial migration flows move positively towards this province 4. In 215, as mentioned above, with oil prices more than 4% lower than last year, economic activity in Alberta decelerated, and so did the opportunities offered by its labour market. As a consequence, the unemployment rate gap between Alberta and most other provinces shrunk. In that context, it is expected that trends in interprovincial migration will reverse by late 215 and 216, as forecast by the relationships of the figures below. That deterioration of interprovincial flows are likely to be a drag on Alberta s economy through lower spending on housing, personal consumption, and taxes. That fluidity in the labour market is crucial to the Bank of s adjustment scenario as it allows qualified workers to fill the growing number of employment vacancies in Ontario, BC and Quebec and therefore helps the national unemployment rate to remain around its current level. (7.% in June 214 and 7.1% in Sept. 215). In conclusion, since the start of the oil shock, the Canadian economy created more than 2k full-time positions. This suggests that, despite a moderate recession in the first half of 215, the labour market is holding on well. Nevertheless, it is by looking at regional dynamics that the complex set of adjustments the Canadian economy is undergoing starts to appear. Through recent dynamics in job creation, unemployment rate and job vacancies, we notice that the poles of economic opportunities are shifting in. In turn, those movements pave the way for a shift in interprovincial migration. With the unemployment gap between major provinces and Alberta shrinking, the latter is expected to attract fewer workers this year and next year. In the end, these are the first signs that a reallocation of labour and capital across sectors and regions is actually taking place following the oil shock. The confirmation of that reallocation phenomenon is at the center of the Bank of s base case economic scenario and supports a reaffirmation of the current monetary policy stance. Dominique Lapointe Economist LapointeD@vmbl.ca 4 Bear in mind that an improvement in the net flow of interprovincial migrants does not imply a positive net flow of interprovincial migrants. In fact, there is still a higher number of families from other provinces migrating to Alberta than the opposite. Figure 7 Net Interprovincial Migration Flows and Unemployment Rate Thousands * Thousands Alberta vs B.C. Change in Net Interprovincial Migration (LHS) Percentage Points Change in the Unemployment Rate Gap (RHS) * Thousands Alberta vs Ontario Alberta vs Québec Percentage Points Percentage * Source: Statistics, LBS Econ. Res. and Strategy October 27, 215 4

5 North American Forecasts Annual Average Q4/Q4 214Q3 214Q4 215Q1 215Q2 215Q3 215Q Real GDP Consumption Business investment Non-residential structures Machinery and equipment Residential construction Government spending Exports Imports Inflation Total CPI (y/y % ) Core CPI (y/y % ) Unemployment rate (% ) * Employment Housing starts (in s) * Nominal GDP *Av erage rate for the period. Updated: November 215 Financial Forecasts 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 16Q2 16Q3 16Q4 Overnight Rate Target Month Treasury Bills Year Bond Year Bond Year Bond Year Bond United States Federal Funds Rate Target** Month Treasury Bills Year Bond Year Bond Year Bond Year Bond Canadian Dollar (US$/C$) Euro (US$/Euro) S&P 5 Index TSX Index Oil WTI (US$/barrel) Quarter-end data and annual av erages Updated: Novem ber 215 * upper bound of the target range for the Fed funds October 27, 215 5

6 Market Review: Bonds and Currencies INTERNATIONAL BONDS Benchmark 2-Year Yield Yield (%) Oct week -4 weeks -1 quarter - 1 year Jan-1-15 U.S Spread US Germany France Portugal Spain Belgium Netherlands Italy Switzerland UK Australia Japan INTERNATIONAL BONDS Benchmark 1-Year Yield Yield (%) Oct week -4 weeks -1 quarter - 1 year Jan-1-15 U.S Spread US Germany France Portugal Spain Belgium Netherlands Italy Switzerland UK Australia Japan PROVINCIAL BONDS Benchmark 1-Year Yield Current Spreads (b.p.) against Oct Oct week -4 weeks -1 quarter - 1 year Jan Alberta British Columbia Prince Edward Island Manitoba New Brunswick Nova Scotia Ontario Quebec Saskatchewan Newfoundland & Labrador Currencies CURRENCIES Oct week -4 weeks -1 quarter - 1 year Jan-1-15 (% chg) (USD/CAD) (CAD/USD) Australia (Australia/US$) U.K. (US$/ ) Japan (US$/Yen) Euro (US$/Euro) Mexican Peso (Peso/US$) Brazilian Real (Real/US$) Chinese Yuan (Yuan/US$) Data updated as at: 23/1/215 October 27, 215 6

7 Market Review: Fixed Income Charts % Year Federal Bond Yield U.S. % Year Federal Bond Yield U.S Oct-8 Oct-9 Oct-1 Oct-11 Oct-12 Oct-13 Oct-14 Oct Oct-8 Oct-9 Oct-1 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 % - Yield Curve % U.S. - Yield Curve Oct-15-1 month -1 year Oc t-15-1 month -1 year m 6m 2y 5y 1y 3y. 3m 6m 2y 5y 1y 3y Yield Spreads in basis points ( minus U.S.) 22-Oc t-15-1 month -1 year 3m 6m 2y 5y 1y Apr-13 Jul-13 Oct-13 Spread on 2-Year Federal Bonds (Can-U.S., in basis points) Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 October 27, 215 7

8 Market Review: Stocks Exchange and Commodities Stock Market Summary Level Change (%) Oct w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-1-15 S&P/TSX 13,878 15,451 13, S&P/TSX S&P/TSX Small Cap Index United States S&P 5 2,53 2,131 1, Dow Jones 17,489 18,312 15, Nasdaq 4,92 5,219 4, International U.K. - FTSE 1 6,376 7,14 5, Germany - DAX 1,492 12,375 8, France - CAC 4 4,82 5,269 4, Japan - Nikkei ,436 2,868 15, Hong Kong - Hang Seng 22,845 28,443 2, Russia - RST 876 1, Australia - ASX All Ordinaries 5,3 5,955 4, Brazil - Bovespa 47,772 58,52 43, S&P/TSX Sector Summary Level Change (%) Oct w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-1-15 S&P/TSX 13,878 15,451 13, Energy Materials Industrials Consumers Discretionary Consumers Staples Health Care Financials Information Technology Telecommunication Services Utilities Commodities Level Oct w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-1-15 London -- Gold (US$/once) London -- Silver (US$/once) Copper (US$/LB) WTI Crude Oil (US$/barrel) Natural Gas (Henry Hub) (US$/MMBTU) Data updated as at: 23/1/215 October 27, 215 8

9 Calendar of Major Economic Indicators KEY ECONOMIC INDICATORS WEEK OF OCTOBER 26, 215 Date Time Release Unit Data for: LBS * Consensus Previous Oct 29 8:3 Industrial Product Price M/M September % Oct 29 8:3 Raw Materials Price Index M/M September % Oct 3 8:3 Gross Domestic Product M/M August.%.1%.3% * Laurentian Bank Securities Forecast Consensus from Bloomberg L.P 1/23/215 United States Date Time Release Unit Data for: LBS* Consensus Previous Oct 26 1: New Home Sales Thousands September Oct 26 1: New Home Sales M/M September % 5.7% Oct 27 8:3 Durable Good Orders M/M September % -2.3% Oct 27 8:3 Durable Good Orders Ex. Transportation M/M September -.% -.2% Oct 28 14: FOMC Rate Decision - Oct 28.25%.25%.25% Oct 29 8:3 Initial Jobless Claims Thousands Oct Oct 29 8:3 GDP (Annualized) Q/Q 3Q A - 1.7% 3.9% Oct 29 8:3 GDP Price Index Q/Q 3Q A - 1.4% 2.1% Oct 29 8:3 Core PCE Q/Q 3Q A - 1.4% 1.9% Oct 3 8:3 Personal Income M/M September -.2%.3% Oct 3 8:3 Personal Spending M/M September -.2%.4% Oct 3 8:3 PCE Core M/M September -.2%.1% Oct 3 8:3 PCE Core Y/Y September - 1.4% 1.3% Oct 3 9:55 U. of Michigan Confidence - Oct F Consensus from Bloomberg L.P 1/23/215 October 27, 215 9

10 North American Economic Indicators CANADA Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year Gross Domestic Product (GDP) July.3%.4%.6%.8% Manufacturing Shipments July 1.7% 1.7% 4.% -2.7% Housing Starts ( ' ) * August Retail Sales July.6%.4% 1.9% 1.9% Trade Balance (M$) * July ,57 2,52 Employment ( ' ) * * September Unemployment Rate * September Wages (avg. hourly earnings) September 3.% 3.4% 3.1% 1.2% Total CPI inflation September 1.% 1.2%.9% 2.3% Inflation ex-food & energy September 2.2% 2.2% 2.2% 2.3% Industrial Product Price Index (IPPI) August -.3%.7% 1.% -.4% IPPI ex. energy August.4% 1.% 1.8% 4.% UNITED STATES Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year ISM - manufacturing * August ISM - Non-manufacturing * August Industrial Production * August Capacity Utilization Rate * August Consumer Confidence Index * September Retail Sales August.%.8%.7% 2.% Trade Balance (M$) * July -41,87-45,25-42,258-41,275 Housing Starts ( ' ) * August 1,132 1,152 1, Existing home sales August -5.% 1.8% -.4% 6.% Median price of ex. home sales August -1.4% -1.9% -.2% 4.6% Non-Farm Payrolls ( ' ) * * August Unemployment Rate * August Wages (avg. hourly earnings) August 1.9% 1.9% 2.% 2.5% Total CPI inflation August.2%.2% -.1% 1.7% Inflation ex-food & energy August 1.8% 1.8% 1.7% 1.7% Producer Price Index August -.5% -.1%.2% -2.9% - Ex-Food & Energy August -.1%.1%.5% 2.1% * Lev el, * * Change in lev el for the last month, 3 months and 1 y ear, * * * Annual % change Data updated as at: 23/1/215 This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of. The author has taken all usual and reasonable precautions to determine that the information contained in this document has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your Investment Advisor, who can assess the relevant factors of any proposed investment or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be reproduced, distributed, published or referred to in any manner whatsoever without in each case the prior express written consent of Laurentian Bank Securities. October 27, 215 1

Houston, We Have The Tools! The Federal Reserve Is Ready, Willing And Able To Do What It Must When The Time Comes.

February 23, 21 Houston, We Have The Tools! The Federal Reserve Is Ready, Willing And Able To Do What It Must When The Time Comes. LBS Economic Research Carlos Leitao Chief Economist (514) 35-3 leitaoc@lb-securities.ca