The business community strongly feels that there is a labour shortage in Canada. Every major business organization identifies labour shortages as one of the biggest challenge.

Economists are more sceptical about labour shortages, reflecting their seeming absence in data on job vacancies and wages. More generally, economists are suspicious of forecasts of shortages based on demographic trends, which have a poor forecasting record.

Firms and economists hold very different views. Most data shows increasing shortages in parts of the Canadian economy and while not as severe as in 2008, they still exist. One reason shortages are less severe today is that employers have adopted several strategies to expand their labour supply, using their pre-recession experience. These include encouraging employees to stay beyond the usual retirement age, extending their hours of work and selectively using the Temporary Foreign Workers program.

Using all these tools to increase labour supply, employers have capped conventional measures of shortages and their wage bill, a display of their adaptability faced with the reality of current and future shortages. An emphasis is placed on expanding the supply of labour, especially of the most valuable workers, as the solution, which goes against the idea that restricting hours worked would aid the economy.

However, employers know that many of these tactics can’t be sustained, which is why they are concerned about shortages now and in the near future. Economists look for evidence of shortages in past data while firms approach the question looking towards the future, knowing they will soon have to replace their oldest workers with new sources of labour.

The future supply of labour is a cause for concern for many employers. One of the most striking divides in today’s labour market is the large gap between unemployed adults and youths. Adult unemployment is at a record low, and remains high among youths. Ontario’s youth unemployment rate of 16% is nearly three times as high as for adults. High unemployment among youths creates the statistical illusion that there is a large pool of labour available to work, raising doubts about labour shortages. However, this calculation is misleading because employers cannot hire youths, especially teenagers, to replace their best workers who are approaching retirement. This increases the need for employers to encourage their older workers to stay in the labour force, often working very long hours. A further complication is that almost half of full-time students are looking for work, but their studies obviously limit the time they can devote to work. For employers, this rules out many full-time students as a viable job candidate. For all these reasons, employers do not regard most youths as viable substitutes for their seasoned employees.

Another reason many firms do not evaluate young people highly is that today’s youth has acquired different skills.  As the share of youths in community colleges declines and those in university increase, a mismatch has been created between the skills possessed by youths and the skills demanded by employers. Measured by unemployment rates, high school students who go on to acquire a certificate or diploma fare significantly better than university graduates. One implication is that Canada’s education system must produce graduates with the skills employers want. However, these patterns have not existed long enough to be reflected in wages and it appears lucrative for students to pursue a university education.

Cutbacks to in-house training by firms occurred when Canada’s education system expanded significantly, especially universities. The result, from a global perspective, is a substitution of education done in our public sector for the private sector.  Not surprisingly, the functioning of Canada’s labour markets have been harmed. It would be beneficial to have the private sector more involved in education and training.

It is often asked why wage increases have not increased significantly. Part of the answer is the drag from central Canada’s weak labour markets, which mask a clear acceleration of wages in some provinces and industries. Simultaneously, if raise wages to attract new workers, they will have to raise wages for all their workers. This is especially true for one-industry towns, commonplace in the resource sector. So there is an incentive for employers to use a variety of non-wage incentives to attract new workers. These incentives include everything from paying for moving expenses to signing bonuses, but do not show up in conventional measures of wages.

Source: Financial Post