By Huw Lloyd-Ellis, Queen’s University

Over the past year or so, most Canadians have experienced situations that appear to be associated with shortages of labour in various sectors of the economy. Whether they’ve been unable to obtain certain goods and services, have observed construction projects sitting idle or, most recently, have lost their luggage while travelling through Pearson airport, many experiences point to significant problems in the labour market. These issues are not unique to Canada, however, and similar trends are being observed in several other OECD countries (especially the USA, the UK and Australia).  

Measuring Labour Shortages

While we all have anecdotes and there is ample discussion of the issue in the media, it is useful to have quantitative measures of labour shortages. This allows us to gauge more clearly (1) how significant these shortages are, (2) in what industries they are most acute and (3) the variation that has occurred over time. Understanding these features is essential for determining the underlying causes of labour shortages and therefore the likely role of policy in mitigating them. A labour shortage essentially means that employers have jobs that they want to fill but there are relatively few workers who are looking to take those jobs. Economists therefore typically measure the extent of such a shortage using “market tightness”: the ratio of the vacancy rate to the unemployment rate.[1] While unemployment rates across industries are commonly available via Statistics Canada’s Labour Force Survey (LFS), measures of vacancy rates that are comparable across industries and over time have only been available relatively recently through their Job Vacancy and Wage Survey (JVWS).

Here I make use of quarterly estimates of vacancy rates which are available from Statistics Canada since the first quarter of 2015. Both vacancy rates and unemployment rates can exhibit a fair amount of seasonality, especially in certain industries. Moreover, the “normal” level market tightness can vary across industries reflecting the specific nature of their labour markets. For these reasons, I focus on market tightness in each industry from 2019 onwards relative to the 4-year average for that quarter during 2015-18. Consequently, a relative market tightness (RMT) value exceeding 1 implies more acute labour shortages relative to 2015-18. Data on vacancies for the second and third quarters of 2020 are unavailable due to some Statistics Canada operations being suspended during that period.

How significant is the Canadian labour shortage?

Figure 1 documents the average RMT score for all industries from 2019 to the first quarter of 2022.[2] While the data for the middle of 2020 is unavailable, we can guess that it fell dramatically during the lockdowns of the second quarter before rising again in the second quarter. This is because the unemployment rate spiked upwards while the vacancy rate declined. More importantly for the question at hand, we can see that market tightness grew dramatically from the end of 2020 until 2022. The Canada-wide RMT score has essentially doubled relative to 2019 indicating a dramatic increase in labour shortages on average during 2021-22.

In which industries is the labour shortage most acute?

Unemployment and vacancy rate data is also available by 18 major industries. Figure 2 (over) shows how the RMT score has evolved for 12 of these industries where it exceeds 2 by the end of the sample. Table 1 ranks all industries in order of their most recent RMT score. As may be seen, the oil and mining sectors, the construction sector and professional, scientific, and technical services have all reached market tightness close to 4 times that experienced during 2015-2018. These sectors are therefore experiencing the most acute labour shortages compared to normal times. However, significant labour shortages (RMT close to 3) are also observed in manufacturing, real estate, finance and utilities. Accommodation and food services, retail trade, health services, and transportation and warehousing are experiencing labour shortages but to a lesser extent (RMT close to 2). Interestingly, the implied labour shortage in accommodation and food services appears to have lessened by 2022, after being particularly acute last summer.

To what extent does the labour shortage pre-date the pandemic?

While the apparent rebound in demand following the lockdowns of 2020 and early 2021 (combined with rising oil prices) has dramatically exacerbated the Canadian labour shortage, Figures 1 and 2 also document that on average and in many industries the labour market was already tight in 2019 relative to previous years. This is indicated by a RMT value consistently exceeding 1 on average and in most industries. Again, this is a phenomenon that is not restricted to Canada but characterizes several other OECD countries and therefore likely reflects common factors affecting multiple countries.[3]

Table 1: Canadian Industrial sectors ranked by most recent RMT score.

Industrial Sector	RMT Score 2022:Q1
Mining, quarrying, and oil and gas extraction	4.17
Professional, scientific, and technical services	3.82
Construction	3.80
Wholesale trade	3.36
Real estate and rental and leasing	3.06
Manufacturing	2.97
Finance and insurance	2.88
Utilities	2.83
Retail trade	2.51
Other services	2.36
All industries	2.34
Accommodation and food services	2.30
Transportation and warehousing	2.30
Health care and social assistance	2.29
Business, building and other support services	2.09
Educational services	1.76
Public administration	1.63
Information, culture, and recreation	1.44
Agriculture, forestry, fishing and hunting	1.18

What is the cause of rising Canadian labour shortages?

Researchers and policy analysts in various countries have identified several possible explanations for this phenomenon that might be associated with the pandemic. However, it is not clear whether these can account for what is happening in Canada. For example:

• The withdrawal of women and seniors from the labour market (due to fears of contagion, health issues and inadequate childcare facilities) who have not yet returned. While there is empirical evidence of this in the US, the data for Canada and other countries is not supportive.
• There has been a rising “quit rate” or “great resignation”. This may reflect cyclical factors since tighter labour markets tend to result in greater job mobility. However, it may also reflect structural factors resulting from the pandemic: workers (especially those on the front line) are no longer willing to accept jobs characterized by low pay and poor working conditions. Again, while there is evidence of this in certain industries in the US, the proportion of Canadian workers who quit their jobs in 2021 was not significantly greater than in 2019.

As noted above, the dramatic increase in market tightness in 2021-22 is in large part a result of the rebound in demand. Countries, including Canada and the US, that provided generous government support to replace lost income during the pandemic have experienced relatively strong subsequent rebounds (and high inflation). However, there are also underlying longer-term labour shortages that predate the pandemic: the RMT was already well above 1 in 2019. One likely contributing factor is the aging of the workforce and the retirement of the baby-boom generation. This workforce transition has only just started and, if anything, is likely to have accelerated during the pandemic. The labour shortfall due to the ongoing retirement of skilled and experience workers will remain a significant factor in key industries for some time to come. As competition for the remaining workers heats up, it is likely to result in wage increases and further inflationary pressure.

Policy Implications

To the extent that the increase in market tightness is cyclical, there are several “standard” policy approaches that could help to relieve short-term labour shortages. On the supply-side, these include technological improvements that increase the efficiency with which job vacancies can be matched with available workers, assistance and retraining to enable current non-participants to enter or re-enter the workforce and assistance with the cost of re-location. Ultimately, however, this economy-wide increase in market tightness will be mostly reduced via a contraction in demand. Macroeconomic policies that are tightening both monetary and fiscal stimuli are already under way. It is hoped that these can counteract an overheated economy without causing a recession.

In the long run, however, structural labour shortages can only be relieved by either discouraging retirement of skilled and experienced workers or replacing them in some way. Increased automation may play a role in this regard, although it is inherently difficult to substitute for the many workers who conduct non-routine activities. For a country like Canada, a major source of skilled and experience workers could come from immigration. We already have ambitious targets in this regard, but achieving these goals is currently being undermined by application processing times that themselves appear to be exacerbated by labour shortages!

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[1] The vacancy rate is the fraction of jobs openings that are currently unfilled. The unemployment rate is the fraction of those available to work who are currently looking for a job.

[2] This is the most recent quarter currently available from the JVWS.

[3] See “The Post-COVID-19 rise in labour shortages,” OECD Economics Department Working Papers No. 1721. (https://dx.doi.org/10.1787/e60c2d1c-en).

Huw Lloyd-Ellis, PhD, is a Professor in the Department of Economics at Queen’s University. He has also led efforts to model the impact of COVID-19 on Canadian labour markets over the past several years. He is the sector lead for studying the labour market and macroeconomic impacts of COVID for NSERC’s One Society Network, and led the development of Limestone Analytics’ STUDIO model that was applied to projects for Canada’s Digital Technology Supercluster, Global Canada’s COVID Strategic Choices Group, and for customized policy analysis in Canada, Rwanda, and Malawi.