Bank of Canada Declines to Comment on Full Employment Measure Amid Deteriorating Job Market Analysis
The Bank of Canada (BoC) recently faced criticism for not addressing the concept of full employment in its March 6 interest rate announcement. While the BoC’s primary goal is to return inflation to 2 percent, it also has a responsibility to support maximum sustainable employment (MSE), similar to the dual mandate of the U.S. Federal Reserve. However, the BoC has not provided an MSE analysis since last July, leading to speculation about the reasons behind this decision.
According to David-Alexandre Brassard, chief economist at Chartered Professional Accountants of Canada, the labor market indicators have deteriorated significantly. Previously, the labor market was overheated, with high levels of labor shortages and wage growth. Bank of Canada Governor Tiff Macklem explained that achieving 2 percent inflation and MSE go hand in hand. If the economy is below full employment, inflation will be below target, and if it is above full employment, upward pressure on wages and prices will occur.
One challenge with measuring MSE is that it changes over time due to shifts in the labor force, such as more women and older people working. Other factors, like an aging population and record immigration, also impact MSE. Brassard expressed concerns about benchmarking with the past, emphasizing the need to adapt to current circumstances.
Senator Diane Bellemare is pushing for full employment to become a part of the BoC’s mandate through Bill S-275—An Act to Amend the Bank of Canada Act. Bellemare argued that having full employment as a safeguard would prevent the BoC from raising interest rates too high, which could negatively affect investment productivity and the country’s standard of living.
Despite concerns about a deteriorating job market, BoC Governor Macklem reported improvements in labor market balance and signs of easing wage pressures. The unemployment rate fell to 5.7 percent in January, marking the first decline since December 2022. However, the January jobs report highlighted a trend of more public-sector and part-time work, indicating that labor demand has not been strong enough to absorb the population boom led by international migration.
Regarding inflation, the BoC held its policy rate at 5 percent on March 6 and stated that it is not considering rate cuts yet due to persistent underlying inflation pressures. CIBC economists argued that the BoC’s measures of core inflation are overstating the inflation rate and that excluding volatile items from the consumer price index would result in core inflation being between 2 and 3 percent. Despite this, Governor Macklem expressed confidence in the BoC’s preferred measures of core inflation and emphasized the Governing Council’s consensus that now is not the time to cut rates.
In conclusion, while the Bank of Canada focuses on returning inflation to 2 percent, questions have been raised about its approach to supporting maximum sustainable employment. Critics argue that the BoC should prioritize full employment as part of its mandate to ensure a balanced labor market. As the job market deteriorates and concerns about inflation persist, policymakers will need to carefully consider their approach to maintain economic stability and support sustainable employment.
