Linda Nazareth, educational gapLabour shortages are suddenly everywhere, which is not as good for workers as it sounds, writes Senior Fellow Linda Nazareth.

By Linda Nazareth, Dec. 31, 2017

Labour shortages are suddenly everywhere, which is not as good for workers as it sounds. When fast-food outlets are forced to close because there is no one to staff them, you can be sure something is about to give. Right now, a top-of-the-cycle economy combined with an aging population is creating a sweet spot for labour, but it might be a fleeting one.

Unemployment rates in Canada and the United States are now the lowest they have been in decades. In the United States, the unemployment rate held at an almost 17-year low of 4.1 per cent in November, while in Canada the rate was 5.9 per cent, the lowest since 2008. Those are impressively low rates, given that they peaked at 10 per cent and 8.3 per cent, respectively, during the worst days of the Great Recession. Years of economic stimulus are finally working as they should and business conditions are strong.

Unemployment rates may yet fall further. Goldman Sachs projects that the U.S. unemployment rate could bottom at 3.5 per cent by the end of 2019, something not seen since the 1960s. In Canada, things are likely to be less dramatic but few are forecasting a rise in the unemployment rate. In a recent forecast, TD Economics is now looking for the rate to stay at around 6 per cent for the next two years.

And so we get the stories of labour shortages, of companies not being able to fill orders or of retailers unable to find enough workers to staff the holiday period. At the extreme, we get the situation we had earlier this year in Lévis, Que., where a KFC outlet (or PFC as it is known in the province) was forced to close its doors because it simply could not find enough people to run operations. The Quebec case highlights that it is not just a strong economy, but rather a strong economy paired with an aging population, that is the problem. In Quebec, the number of those between the ages of 15 and 64 fell by almost 1 per cent between 2011 and 2016, while the population aged over 65 rose by 19 per cent. Perhaps we would be wise to take the province as the canary-in-the-coalmine of what will happen across North America as the population gets older.

The usual trajectory is for unemployment rates to fall and for wages to rise, with interest rates going up somewhere along the way. As has been much discussed, that rise in wages has been slow to happen. A fractured labour market with more contract and part-time workers has allowed businesses a bit of leeway in giving workers more money. Still, that delay is likely over, and central banks are tightening policy in anticipation of higher wages next year. So yes, workers in fast food and in many other industries are likely to get raises, perhaps the first in a long time. (Minimum wages are also going up in Ontario, Alberta and a number of other places in 2018.)

The fast-food conundrum also highlights something else, which is that wages can only rise so much without threatening a whole economic model. That is, KFC might be able to find enough workers if it paid $50 an hour, but if it did that it would have to raise prices to a level that would completely alienate its customer base. And so they need to find another solution, as will companies in every industry and at every skill level as we go forward.

And so, robots to the rescue – okay, maybe not robots that fry your chicken and serve it up, but any technology that reduces the need for human workers. Kiosks and online ordering are already in full force in the restaurant world and the impetus is there for anything else that might bring costs down. In the energy sector, for example, the recent squeeze in profitability when prices plummeted caused a massive investment in labour-saving technology.

Over all, the speed at which companies have adopted technology to date has actually been rather slow, which makes sense since workers have been relatively cheap. That is one reason why productivity growth in Canada has been distressingly weak in recent years: lack of capital investment. Looking forward, if demographics make workers more expensive, the push to substitute robots for humans will get increasingly intense. Fast food is on the leading edge, but any industry, if pushed, will increase technology spending if it makes economic sense.

None of this is to suggest that spending on technology is a bad thing or that it will not lead to a rise in the standard of living over the longer term. Historically, that has always been the case, albeit with some periods of adjustment. As we go into 2018, low unemployment rates and labour shortages may lull us into forgetting that one such adjustment is likely just around the corner. The next year or two may be banner ones for workers, but we should also be preparing for the next economic phase, which may not be quite as favourable for them.

Linda Nazareth is the Senior Fellow for Economics and Population Change at the Macdonald-Laurier Institute.