At first glance, according to several commonly used indicators, Canada’s labour market has recovered from the initial COVID recession that began in 2020. Canada’s unemployment rate is now lower than when the pandemic hit, and the employment rate (the share of the adult population that’s working) has almost recovered to pre-COVID levels.

However, the story is more complicated than the headline numbers suggest. The latest monthly labour force statistics confirm that the government sector—not the private sector—has driven job growth since 2020.

Let’s look at the numbers. From February 2020 to July 2022, the Canadian economy has produced a net increase of 422,900 jobs, which has been adequate to keep pace with population growth so today’s employment rate is approximately the same as it was pre-pandemic.

Again, this may seem like good news, at first glance. But the government sector created 366,800 of those 422,900 new jobs. The private sector (including self-employment) is responsible for just 56,100 net new jobs. This means the government sector, which represents roughly one-fifth of jobs in the economy, has created 86.7 per cent of new jobs since the pandemic began.

Growth rates in both sectors tell a similar tale. Since February 2020, government employment has increased by 9.4 per cent compared to just 0.4 per cent for the private sector. The government sector is adding jobs quickly while job creation in the rest of the economy is sputtering.

The private sector’s performance looks bleaker when you consider that Canada’s adult population is growing yet private-sector employment has not kept up. In fact, the private-sector employment rate in July 2022 is lower than it was in February 2020, at the dawn of the pandemic in Canada and the initial COVID recession.

Things look even worse when you zoom in further on the private-sector labour force data and separate self-employment from other types of private-sector jobs. Specifically, self-employment alone has fallen by 7.4 per cent since February 2020, which represents a net loss of 214,400 self-employed individuals, enough to almost entirely wipe out the private sector’s non-self-employment net job gains. Given that self-employment has historically been an important measure of entrepreneurship, these data raise concerns about the future of new business formation, a key driver of employment and economic activity.

These trends also spell trouble for the health of government finances across Canada. The federal government and several provinces (including Ontario) face projected operating budget deficits this year.

In addition to these expected budget shortfalls, an independent analysis from the Finances of the Nation project show that the fiscal situations for provincial governments across the country are unsustainable, which means that, in the absence of policy change, government debt burdens are on track to keep rising over time relative to the size of provincial economies. A surge in government hiring means more spending on government-sector wages and salaries. This will make it more difficult for the federal government and various provinces to balance their books and put their finances on a sustainable long-term trajectory.

Despite rosy headlines, Canada’s private sector has seen almost no job growth since the onset of the pandemic. Rapid job growth in the government sector has masked the weakness in the private sector. Simply put, this type of government-driven labour market recovery is unsustainable. Over the long-term, Canada’s prosperity and the health of government finances require a dynamic private-sector labour market, something which has yet to emerge in the COVID era.