Employers innovating to overcome tight labour markets in Canada

The question of whether Canada’s economy suffers from labour shortages has been viewed quite differently by employers and economists. The business community almost universally identifies shortages as a problem, especially for skilled workers. That shortages so far have been less severe or widespread than just before the 2008 recession does not mean they are non-existent. Economists are more skeptical, recalling past warnings of shortages that did not materialize while noting that business forecasts of shortages could be motivated by the self-interest of lobbying for measures that boost labour supply and a lid on wage costs. Moreover, the available data on vacancies and wages seem benign, at least at the national level.

This paper attempts to reconcile these two seemingly opposite views. First, it concludes that employers, drawing on their experience with shortages before the recession, have been more innovative in adopting strategies to increase labour supply. These include encouraging employees to delay retirement and work longer hours (nearly one-third of Albertans work over 50 hours a week). However, working incumbent employees more intensively is not sustainable in the long term, especially for older workers. Much concern about shortages is based on the looming retirement of the boomer generation, especially since new sources of labour supply take time to adapt. However, economists note that the track record of predicting shortages based on the need to replace retirees is poor: Europe today is an excellent example of an older society without a shortage of labour.

The next point is the existence of a record gap between unemployment for adults and youths. This distorts measures of available labour supply that economists study if employers do not regard youths as substitutes for older workers. The reasons for the high level of youth unemployment at a time of shortages in some sectors partly reflects the skills youths have acquired, especially their marked shift from community colleges to university education over the past decade. Youth unemployment also is high because their participation rate has stayed high, especially among teenagers and full-time students who employers are reluctant to hire. Meanwhile, training conducted by firms has lagged, leaving the public sector increasingly responsible for human capital formation. Not surprisingly, labour market outcomes have deteriorated too.

Finally, national wages have not accelerated markedly due to lingering slow growth in central Canada. This has masked a clear upturn in wages in most Western provinces and in Newfoundland. Firms have also resorted to a wide range of non-wage benefits to induce people to join them, partly to avoid having to pay more for their incumbent employees.

Are there labour shortages in Canada? The answer from the business community is an unequivocal yes. Every major business organization, including the Canadian Chamber of Commerce, the Canadian Council of Chief Executives, the Canadian Manufacturers and Exporters and the Canadian Federation of Independent Businesses, identifies a shortage of  labour as a problem and often the number one challenge facing businesses, especially for skilled trades. The final assessment of the National Skills Summit was that there was a “very real skills gap” in Canada” and that “despite recent suggestions the skills gap may be overstated, business leaders and senior executives…are keenly aware of the urgency around skills and training in Canada.”

Economists are more skeptical than employers about the extent of labour shortages in Canada. This reflects the difficulty in measuring labour shortages in conventional data sources such as job vacancies, as well as the lack of upward pressure on the overall wage bill. More generally, economists are suspicious of forecasts of shortages based on demographic trends, which have a poor forecasting record. The underlying strength of demand is a better determinant of the evolution of the labour market than supply; Europe’s population is aging faster than Canada’s, but has a surplus of labour because of its weaker economic growth.

This paper examines more closely the question of whether specific types of labour shortages exist or are looming in Canada, with the goal of explaining and reconciling the views of business and economists. Most data point to nascent shortages in parts of Canada and in some industries. The Bank of Canada’s survey of large firms found 22% reported labour shortages in mid-2014, up from 20% a year-earlier and a low of 10% during the recession but below the highs of 40% set just before the recession. That these shortages are not as severe as in 2007 and early 2008 does not detract from their existence.

One reason shortages are less severe than before the recession is that employers have adopted several strategies to expand the total labour supply, drawing on their earlier experience with shortages. These include keeping employees in the labour force beyond the usual retirement age, extending their hours of work and hiring them to do multiple jobs. The Temporary Foreign Workers program has helped alleviate shortages in specific locales and industries. Using all these tools to increase labour supply, employers have capped conventional measures of shortages and their wage bill. This is a tribute to the adaptability of employers faced with the reality of current and impending shortages in some parts of the country, and for some skills across most of Canada.

However, employers know that many of these mechanisms cannot be sustained for long, which may explain why they are concerned about shortages now and in the near future. Some of the disconnect between how businesses and economists approach the question of shortages revolves around the time frame being addressed. Economists look for evidence of shortages in data, which inevitably are backward looking. Firms approach the question with an eye to the future, knowing that they will soon have to replace their oldest workers with new sources of labour.

The future supply of labour is worrisome for many employers. One of the most striking divides in today’s labour market is the record-sized gap between unemployment for adults and youths. For adults, unemployment is close to a record low, while it remains stubbornly high among youths. This dichotomy by age also helps explain the difference between how employers and economists assess the question of shortages. Employers want mature people who can step in and do a job immediately, apparently shunning some youths as lacking the commitment, the experience or the skills they require. For all these reasons, employers do not regard some youths as the close substitute for adult employees implied by several statistics, such as the simple comparison of the number of unemployed to job vacancies. High unemployment among youths creates the statistical illusion that there is a large pool of labour available to work, raising questions among economists about the existence of shortages. However, this calculation is misleading if employers do not regard youths, especially teenagers, as a substitute for their most experienced and productive workers who are approaching retirement. If youths are not qualified, this increases the need for employers to encourage their older workers to stay in the labour force, often working very long hours.

One reason why many firms do not regard some of the current cohort of youths as substitutes for an aging labour force is the different skills acquired by today’s youths.  As the share of youths in community colleges declines and those in university increase, a mismatch may be created between the skills possessed by youths and the skills demanded by employers. Measured by unemployment or employment rates,  high school graduates who subsequently acquire a certificate or diploma fare significantly better than for university graduates. One implication is that Canada’s education system has to do a better job of producing graduates with the skills employers want. It is important to note as well that these employment outcomes have not persisted long enough to change earnings; based on past earnings, it appears lucrative for students to pursue a university education, and students will respond to this incentive until relative earnings change.

Youths also require more realistic expectations about where new jobs are being created and entry level wage rates. A further complication is that almost half of full-time students are looking for work, but their class load obviously limits the time and energy they can devote to work. For employers, this rules out many full-time students as a viable job candidate. One encouraging note for youths is that the retention rate for those who do find employment has increased.

Cutbacks to in-house training by firms occurred at the same time as Canada’s education system expanded significantly, notably universities. The result, from a macro perspective, is a substitution of human capital formation conducted in our public sector for that done in our private sector. From this perspective, it is not surprising the result has been negative for the functioning of Canada’s labour markets. One solution is to have the private sector more involved in education and training.  Some firms in the private education sector offer courses that last 8 to 12 weeks (not 2 to 4 years) that teach specific skills, and then provide students with a placement officer to help them find work on finishing their studies.

More in-house training would allow firms to develop the specific skills they need. Little is known about the reasons for the reluctance of firms to provide more training. One possible explanation is that there has been a shift from firm-specific skills to general skills, possibly a result of the shift in jobs from manufacturing (where knowledge of how a particular process is not easily transferable to another firm) to natural resources and construction, where skills are more easily-transferred.

The final puzzle is why wage increases have not acceleerated as incipient shortages threaten. Part of the answer is the weight of central Canada’s weak labour markets in the national statistics, which hide a clear accleration of wages in some provinces and industries. As well, employers face a dilemma; if they boost wages to attract new workers, they will have to raise wages for their incumbent labour force. This is especially true for one-industry towns, which often occurs in the resource sector. So there is an incentive for employers to use a variety of non-wage mechanisms to attract new workers, including advertising, recruiting campaigns, labour brokers, paying for moving expenses and signing bonuses. Increasing their use of temporary help, subcontracting and piecework also helps firms avoid the problem of having to raise wages for all employees to hire incremental amounts of labour.