Forget labour shortages – could Canada be headed for a worker glut?

Contrary to current conventional wisdom, those copious baby boomers are boosting the unemployment rate of late, but that is not entirely a bad sign. It suggests Canada could be facing a glut of workers, not a shortage, in the next decade – and a markedly better economic outlook as well.

Despite the latest labour market report that showed job creation had hit a speed bump in December, the Canadian economy over all is performing quite well. As of November, economic activity was up 2.7 per cent from last year, and leading indicators suggest growth accelerated into the end of the year.

While hardly a barn-burning pace, gross domestic product (GDP) growth of that magnitude should have sent the unemployment rate down to at least 6.9 per cent from 7.1 per cent a year ago. What we got instead was a rather humiliating pop to 7.2 per cent.

Indeed, progress in normalizing the unemployment rate after the Great Recession essentially ground to a halt nearly two years ago, when it settled at just below 7.5 per cent, down from an 8.7-per-cent peak in August, 2009. 

Even that rate is flattered by the fact that labour force participation has drifted down to just 66.4 per cent from almost 68 per cent in 2008, as discouraged youth stayed home and the bulge of baby boomers drifted further into retirement age and out of the labour market.

Based on aging population trends and recent labour market behaviour, some projections imply that the unemployment rate could drop below 3 per cent in less than 10 years. These estimates are built on the assumption that youth and older-worker labour force participation stay at current rates.

When it comes to youth, we’ve seen this pattern before – just one generation ago, in the 1990s. Like today, a great deal of the decline in youth labour force participation then was cyclical. Youth labour force participation peaked in the late 1980s, when the changing needs of the job market started demanding increasingly skilled workers and youth responded by focusing more on education. 

Amid this structural shift, a sharp recession in the early 1990s and a sluggish labour market recovery pushed youth unemployment up to nearly 20 per cent by 1992. Younger workers left the labour force in even greater numbers, and the participation rate hit just 60.8 per cent by 1998.

Then, as youth completed their studies and the economy surged during the dot-com boom, youth returned to the labour force in droves. Their numbers were not sufficient to boost the unemployment rate, but they certainly slowed the pace at which it declined.

Currently, youth labour market participation sits at 63.4 per cent, a full three percentage points below its pre-recession high. If youth labour force participation returns to that pre-recession pace over the next couple of years, it will boost the unemployment rate by about three-quarters of a percentage point, all else being equal.

The more interesting trend is the structural one driving older workers. To be sure, labour force participation starts to drop sharply in older age groups. Prime-age workers between 25 and 54 boast a steady labour force participation rate of 86.6 per cent. The boomers age 55 to 59 are not far behind at 73.9 per cent, while those age 60 to 64 are 53.5 per cent engaged in the labour force. The Rubicon is crossed at 65 years, where the participation rate drops to just 13.4 per cent.

The most important thing to note about this pattern of labour participation is how much it has actually climbed as baby boomers entered those age categories. For workers over 65, labour force participation has surged from 5.6 per cent in 1995 to 13.4 per cent today. The 55-59 and 60-64 age groups have boosted labour force participation by 14 and 20 percentage points, respectively.

With roughly half of baby boomers still to shift into the above-65 category, there is a real question about whether they will actually retire. Certainly the steady rise in the 65-plus category in the past decade suggests they will not retire so quickly.

Some counterfactual estimates of older worker labour force participation rates yield some startling unemployment rate projections. If boomers turning 65 maintain a labour force participation rate of 25 per cent until age 75, with normal employment growth of about 220,000 a year, overall unemployment will drop to 6.5 per cent in five years and to 2.8 per cent in a decade, assuming all other factors remain equal. 

However, if boomer participation rates stay at 35 per cent after age 65, the unemployment rate will still be 7.4 per cent in 10 years’ time; if they stay in the labour market at their current rate of 50 per cent, the unemployment rate will be well over 10 per cent.

These rather startling estimates should not be taken to suggest the economy is in for a long period of malaise. Quite the contrary. History shows that higher labour force participation rarely boosts the unemployment rate, but rather it has a positive impact on employment.

If boomers do stay in the labour market in great numbers as recent trends suggest, there is every reason to be more optimistic about potential economic growth as well – more workers create more income, more spending and more profits. As such, in the not too distant future economists could well be raising their current dismal estimates of potential GDP growth – and of corporate revenues and profits as well.

The Globe and Mail