Ever since Canada’s booming December jobs report came out last week, economists have been pondering how the labour market can continue to defy the gravity of an economy that is, by all accounts, inching toward recession. Stephen Brown believes he has spotted a sign that employment is about to come down to Earth.
Mr. Brown, senior Canada economist at independent research firm Capital Economics, noted in a report this week that even as the country added another 104,000 jobs last month, temporary jobs continued what has become a serious downward trend. Temporary employment – casual, seasonal and contract jobs – fell by more than 40,000 in December, and have declined by more than 550,000 in the past six months.
Historically, Mr. Brown said, slumping temporary hiring is a canary in the coal mine for labour markets. Overall employment typically suffers a similar fate within a few months.
“The weakness in temporary employment suggests cracks are showing beneath the surface,” he wrote.
It might be a bit difficult to reconcile that assertion with the latest Canadian data. After all, permanent and full-time positions have been growing strongly. It certainly gives the appearance that temporary work is being replaced by more secure positions – which is evidence of a strengthening labour market, not a weakening one, isn’t it?
Still, the historical trend doesn’t lie.
A shrinking temporary work force, Mr. Brown argues, signals that industries that tend to bring in extra help during short-lived and seasonal busy periods are no longer feeling so squeezed by that demand. It’s often an early sign of a seriously slowing economy, one that will take a bigger and bigger bite out of labour demand as it progresses.
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Even if Mr. Brown’s analysis holds, and the historical pattern repeats itself, the question is just how big that bite will be – and whether it will upend hopes that the economy could still achieve a soft landing.
The surprising resilience of the labour market to date has rekindled optimism for at least a revised version of “soft landing” – one in which, yes, the economy contracts for two or three quarters, but doesn’t incur deep job losses. Call it a labour soft landing.
A labour soft landing would be a significant thing. It implies not only that individuals and households will suffer less pain from the downturn, but that any recession will be a shallow one. Consumer demand won’t suffer the deep hit that it would if a contraction was accompanied by high unemployment.
The recent job statistics make a compelling case that a labour soft landing may already be under way. Canada has added nearly 250,000 in the past four months, even as GDP growth has slowed to a crawl and a recession has looked increasingly likely. The U.S. job market, similarly, continues to post consistently solid growth despite forecasts that the economy is heading into a contraction. Perhaps, some economists have argued, the huge overhang of job vacancies that both countries have carried into this slowdown will sustain employment even as demand fades.
But Mr. Brown cautions that historically, labour markets arrive late to recessions. Employers aren’t that quick to cut payroll when business starts to slip. The economist noted that in previous Canadian recessions going back to the 1980s, employment numbers were strong when the economy entered recession. Over the following six months, the job market had faded markedly.
“The recent strength of employment would not be an anomaly by historical standards,” he said.
Nevertheless, Mr. Brown allows that the current labour market could evolve somewhat differently than during past recessions.
He suggested that because of the “extreme shortages” of workers that employers have struggled with in the recovery from the COVID-19 pandemic, a growing number of economists anticipate what he called “labour hoarding” on the part of employers, which could cushion the job losses in a downturn.
“Firms are going to be a lot more cautious about laying off workers,” he said in a telephone interview Wednesday. He added that the aging of the population – which has translated to rising rates of retirements – will add to the incentive for companies to retain and hire staff, even in the face of slowing demand, to avoid getting caught again on the wrong side of another scarce labour market.
“In previous recessions, firms would lay off their most unproductive workers. Maybe in the next downturn, what firms will instead do is reduce hours across the board,” Mr. Brown said. That way, he said, companies will be able to more quickly bring labour back up to speed, without having to actually find new employees.
“We could see the headline employment numbers remain relatively strong, but the hours-worked numbers weaken,” he said. Indeed, he noted that in some sectors – such as wholesale and retail trade, transportation and warehousing, and manufacturing – the total hours worked have already declined sharply in recent months even if job numbers haven’t.
“That certainly wouldn’t explain why we get a 100,000 jump in employment in one month,” he said. “But going forward, it might suggest we won’t see employment weaken as much as some economists – including ourselves – are forecasting.”