Is there limited room for jobs growth in North America?

The extent to which employment gaps in the U.S. and Canada can continue to be filled is a crucial factor on outlooks for GDP, inflation and interest rates, a report from CIBC says.

Two factors to consider are what kind of mark the pandemic has left on labour markets and how issues such as retiring workers are affecting participation rates, the report by CIBC economists Avery Shenfeld and Andrew Grantham said.

“Of late, there’s a sense that going through the pandemic has left some permanent marks on labour in both countries, making people less willing to work, less eager to fill certain kinds of jobs, and requiring higher wages to bring them on board,” the report said.

Older workers are choosing to retire early while younger workers feel more able to “take a pass” on going to work, it added.

Fewer Americans aged 55+ who aren’t currently working say they want to return to work, leading to a “roughly 1.5 million excess increase in persons 55+ and not in the labour force.”

Yet, the share of Americans in older cohorts not working has been dropping since 2000, due to improving health and fewer retirees covered by defined benefit pensions, the report said.

“The recent pick-up in retirements really only reverses a very small part of the pre-pandemic trend to later retirement, and might be capturing the addition to financial cushions from the combination of generous stimulus cheques, reduced spending during the pandemic, and healthy asset market returns,” the authors wrote.

Canadian data shows no rush to retirement: “the number of Canadians in the 55-64 cohort who have left work due to retirement has actually declined of late.” Lower Covid-19 infection rates might be a factor, the report said, as in-person work in Canada appears less risky, but high household debt could also be weighing on retirement plans.

When it comes to younger workers, the trends are tougher to track due to variations in the way that U.S. and Canadian labour markets account for certain demographics and job-seeking behaviour. But more prime-aged workers have dropped out of the workforce in the U.S.

One potential reason the authors pointed to was Canadian pandemic support being more geared toward wage subsidies, which kept people working even if output was minimal. “It’s worth keeping an eye on upcoming employment reports now that eligibility for these wage supports has been dramatically narrowed,” the report said.

While employers in both countries are reporting labour shortages, wage growth is more evident in the U.S. “U.S. sectors with higher job vacancies are indeed starting to pay up to fill them,” the report said. “However, that isn’t the case yet in Canada, where the correlation between vacancies and wage growth is essentially zero.”

Immigration-based growth will help Canadian employers fill job vacancies, but the lack of population growth in the U.S. will leave companies relying on workers returning to the labour market, the report said.

The expiry of pandemic benefits should help, as Americans run out of savings built up in recent months; lower Covid-19 case numbers and higher wages could also draw prime-aged workers back, the report said. “However, the increasing permanency of lower participation within older age groups means that any rebound in labour force numbers will be incomplete.”

That slack has “potentially crucial implications” for inflation and central bank policy, the authors stated. Inflation has so far been limited to higher prices for goods due to supply-chain disruptions. A labour shortage could drive inflation to the services sector in the U.S.

“While the Bank of Canada currently sounds more hawkish than its American counterpart and will likely be the first to hike rates, we see the Fed overtaking it in the total dose of rate hikes by the end of 2023,” the report said.

The authors forecast two hikes by the Bank of Canada in the second half of next year and three more the following year, bringing the overnight rate to 1.50% in December 2023.

For the Fed, the authors forecast two hikes in the second half of next year and four more in 2023, bringing the federal funds rate to 1.63% in December 2023.

Read the full report.