Labour Force Survey and Interest Rates

My assessment of today’s Labour Force Survey follows:

Manufacturing Crisis Deepens

• The loss of a further 31,000 manufacturing jobs in June pushed total manufacturing employment losses to 95,000 positions since the beginning of February 2007. Since employment in Canadian manufacturing peaked in November 2002, this sector has lost 308,000 jobs.

Construction and Resource Employment Falls

• In June, CIBC and Export Development Canada released commentaries that downplayed the manufacturing crisis by arguing that a surge in construction and natural-resource employment was largely replacing lost manufacturing jobs. The Canadian Labour Congress responded with a reminder that both sectors are quite volatile and cyclical. Indeed, today’s Labour Force Survey reveals that the construction and resource sectors lost 2,000 and 7,000 positions respectively in June. In other words, Canadians cannot rely on construction and resource extraction to compensate for the underlying loss of stable manufacturing jobs.

• Overall, goods-producing industries lost 38,000 jobs in June.

Employment Quality

• Some commentators will point to the creation of 35,000 jobs as evidence of a robust labour market. However, 31,000 of these jobs were in retail and wholesale trade. In June 2007, sales and service occupations paid an average hourly wage of $13.61, compared to an economy-wide average of $20.25.

• Although full-time employment increased nationwide, it declined in Newfoundland and Labrador, Prince Edward Island, and Nova Scotia. British Columbia alone lost 32,000 full-time jobs in June.

Implications for the Bank of Canada

• Some commentators have argued that, due to Canada’s “tight labour market,” the Bank of Canada should raise interest rates on July 10 to quell inflation. However, Canada’s labour market is anything but tight. In June, unemployment grew at a faster rate than employment. Relatively well-paid jobs in goods-producing industries were replaced by less-good jobs in service industries. Real wages have been rising by no more than 1% per year.

• Furthermore, inflation is running at an annual rate of 2.2%, well within the Bank of Canada’s target range of 1%-3%. Even in Alberta, the only province with appreciable inflation, the provincial government has declared its opposition to a rate hike.

• The main consequence of higher interest rates would be to aggravate the manufacturing crisis by making investment costlier and by fuelling excessively high exchange rates. The Bank of Canada should not eliminate more good jobs to counter a nonexistent inflation threat.