OTTAWA, ON (December 23, 2021): Employers are feeling the pinch this year when it comes to finding qualified workers. While the labour market continues to surge and unemployment declines, wages for new and less qualified workers are also increasing. Munk Senior Fellow Philip Cross warns in the latest labour market report that the trend also points to economic challenges ahead.

In a new commentary titled “Tightening labour markets fuel inflationary pressures,” Cross notes that hiring new workers at higher pay may seem positive for the economy, but this can often translate into lower productivity, higher unit labour costs, and has ramifications for tenured employees whose wage growth has risen more slowly

“This reinforces the upward pressure on inflation while eroding our ability to compete with firms in the United States,” writes Cross.

Canada’s labour market was on fire in November as employment soared by 154,000, four times faster than the consensus forecast. This lowered the unemployment from 6.7 percent to 6.0 percent. While women, men and young people experienced surging employment rates, older people were the only group whose employment rate lags.

However, as Cross highlights, “beyond the headlines about jobs and unemployment, many of the details in the monthly labour force survey reveal labour shortages are worsening.”

A Statistics Canada analysis showed that hourly wages for new employees were 10 percent higher in November compared to two years ago, versus only 6.4 percent higher for established employees. According to the author, the narrowing gap between pay levels for new hires and established workers poses a major challenge for employers. Once the wage rate for established workers is raised, their total wage bill increases substantially and will be hard to reverse. Employers must also balance the need to attract new employees while adequately compensating long-time employees for their loyalty and experience.

“The reluctance of employers to ex­tend sharply higher wages to established employees means that higher labour costs are not yet embedded in the economy, giving the Bank of Canada the opportunity to dampen inflation by tightening monetary policy early in 2022,” says Cross.

A shortage of qualified candidates is also leading employers to lower the educational requirements for some jobs as high vacancies are compounded by the end of government programs restoring incentives to find work. There has also been a steady decline of self-employed individuals; many are now favouring increased job security and higher average wages due to the pandemic-related uncertainty. However, a decline in self-employment coincides with a retreat from risk-tasking and decrease in innovation and competition in Canada’s economy.

Meanwhile, labour productivity in the third quarter was 5.4 percent below its level a year earlier. This finding is consistent with employers having to settle for new workers with lower qualifications. With productivity rates falling and wages rising in Canada, unit labour costs rose 6.2 percent this past year.

“Despite the proliferation of job vacancies, falling unemployment, and rising wages for new hires, the number of people in the labour force is not expanding quickly enough to prevent labour shortages,” writes Cross.

To read the full commentary, click the button below.


Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute. Prior to joining MLI, Mr. Cross spent 36 years at Statistics Canada specializing in macroeconomics.

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