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Tuesday March 13, 2018

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February Employment

A mediocre gain in employment, as wage growth remains firm

A small gain in employment, but the second straight downside surprise; Job growth has slowed compared to the 2016/17 pace, but there is too much noise to assess the current state of the labour market; There are still signs of slack in the labour market, even though wage growth remains firm thanks, in part, to higher minimum wages

Employment increased by 15,400 in February. This was below the consensus of a gain of 21,000 (HSBC: 15,000). The increase followed a decline of 88,000 in February. Full-time employment fell by 39,300, the first drop in employment in this category since August 2017. Part-time employment rose by 54,700, which offset less than half of the record 137,000 decline in part-time employment in January.

From a year ago, employment is up by 282,500, or 1.5%. As shown in Figure 1, the pace of employment growth has slowed following a period of acceleration from mid-2016 through late 2017. This drop is consistent with a slower pace of job creation in the full-time category, where job growth has slowed to a 1.9% annual pace from just over 3% in November 2017.

Despite the disappointment on the headline employment change, the unemployment rate fell to 5.8% from 5.9%. The consensus expectation was for the unemployment rate to remain unchanged. Given the very modest increase in employment, the unemployment rate fell because the labour force increased by an even more moderate 6,300. In the month, a 39,600 increase in the prime working age (25 to 54 years) category, was mostly offset by a 3,200 decline in the youth labour force (15 to 24 years of age) and a 30,100 drop in the 55 years of age and over category.

The gain in total employment in the month was largely due to a 50,300 increase in public sector employment, though there was also an 8,400 increase in private sector employment. Self-employment fell by 43,300.

Wage growth remained above 3% year-on-year (Figure 2). In the month, average hourly wages rose by 0.3%, this includes a 0.5% gain among temporary employees. The increase in wages of temporary employees followed a gain of 2.4% in January that was affected by an increase in the minimum wage in Ontario.

Hours worked rose by 0.6% month-on-month in February, offsetting a like-sized drop in January. The rate of growth of hours worked thus moved back above 3% year-on-year.

By industry, there were job gains in the services sector, with gains health care, education, and transportation and warehousing. Goods sector employment fell by 10,400, primarily due to declines in manufacturing, and agriculture. That the bulk of the increase in services employment was in health care and education is consistent with the job gains in the public sector.

Implications

Though minimum wage increases have added some noise to job creation and wage data, there is nonetheless enough evidence to suggest that the overall pace of employment growth has slowed compared to that observed from mid-2016 through late 2017.

The most important story in the Canadian labour market since mid-2016 had been the acceleration in the pace of job creation, which aligned with solid quarterly GDP growth. However, GDP growth slowed markedly in 2017 H2, suggesting that the pace of growth would eventually slow too. As a result, the robust job growth in 2017 Q4 seemed inconsistent with the slower pace of economic growth. The early readings on employment in January and February suggest, to us, that the pace of employment growth in early 2018 might now be becoming more aligned with economic growth in the 1.5% to 2.0% range.

As job growth slows, wage growth has firmed. After having been quite weak even as job creation accelerated in 2016 and through early 2017, wage growth accelerated from mid-2017 onward. More recently, increases in the minimum wage in Ontario and other key provinces are affecting the rate of wage growth. This makes it more challenging to assess underlying wage pressures.

Given the noise from changes to minimum wage rates, we need to await more data in order to determine the state of the labour market. Hence, in our view, today's labour data will not materially affect the likelihood or the timing of the next Bank of Canada rate hike.

In fact, this week, the Bank of Canada sought to downplay the impact of signs of labour market tightness in its assessment of the appropriate stance of monetary policy. In its press statement following its decision to leave the policy rate unchanged at 1.25%, the BoC said that even though wage growth has firmed, it "remains lower than would be typical in an economy with no labour slack." As well, in a subsequent speech, BoC Deputy Governor Tim Lane said that there remains some slack in the labour market owing to "the elevated long-term unemployment rate and relatively low youth participation rate."

Though Canada and Mexico were exempted at least temporarily from US tariffs on steel and aluminium imports, trade policy uncertainty remains elevated. As well, the fate of NAFTA remains unclear. Compounding these trade-related concerns we observe a need to await clarity on the state of the labour market, and need more time to assess the impact of past increases in interest rates on the economy. Accordingly, we continue to believe that the Bank of Canada will leave the policy rate at 1.25% through the end of 2018.



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