Canada’s employment rate has now nearly fully recovered from its unprecedented drop of 10 percentage points last year, but a gap of 2.5 percentage points remains. As with vaccinations, the “last mile” in our labour market recovery may be the most difficult.

Much of the recovery in the employment rate over the summer and fall of 2020 occurred when workers furloughed from their jobs in the initial shutdowns returned to their former places of employment. This process is all but complete as only a small fraction of the workforce is still on temporary layoff. The question we need to ask now is which policies will help close the remaining gap in the employment rate (figure 1).

While it is tempting to reach for the economic toolkit first, it is important we recognize that the economic crisis is first and foremost a health crisis, and that recovery depends most critically on putting the health crisis behind us. As long as customers and workers feel insecure in returning to face-to-face activities and employers face uncertainty about future public health measures forcing shutdowns, the economy will not fully recover.

The best remedy to put the virus and its consequences behind us is clear – boost vaccination rates. As the OECD stated in a recent report: “More jabs, more jobs.” As vaccinations provide us with relief from the pandemic, we need to strengthen the public health system to be able to withstand a potential fall resurgence if pockets of unvaccinated populations remain or if a new variant proves resistant to existing vaccines. Even if the probability of such an event is judged to be low, the costs are high enough to justify significant investments in our public health infrastructure.

Canada needs to use the summer to invest in testing programs, including rapid testing, to be able to identify and get on top of any new outbreaks. It should also invest in reducing transmission in public places, schools and workplaces – possibly through improved indoor ventilation systems. Finally, Canada should plan for the possibility that another round of vaccines might become necessary in the event of a break-out variant.

But getting past the virus may be insufficient in itself.

What ails the labour market in 2021? There are strong indications that it is not a lack of demand for labour. In recent months, we have seen a remarkable recovery in job postings and job openings. Data from Statistics Canada’s Job Vacancies and Wage Survey suggest there were 23 per cent more job vacancies in March 2021 than in February 2020. Data from private companies aggregating job postings from online sources suggest that when we get official data through April and May 2021, this upswing will continue and even accelerate. Moreover, the upswing is evident across all provinces, industries and occupations. This suggests to us that insufficient labour demand will not be an important constraint in the jobs recovery.

We find ourselves at a point when labour supply, and factors that may hold it back, become the primary consideration.

Our first concern is that the unavailability of child care will keep parents (mostly women) with young children from returning to work. Indeed, as figure 2 (below) shows, promising employment gains among parents with kids under age 12 are evident in recent months everywhere except in Ontario, where schools have been closed for almost the entire winter. They opened in most of Ontario on Jan. 25, after an extended Christmas holiday break, but have been closed since March 14, and will stay closed for the remainder of this school year. In contrast, schools have remained open for most of the winter and spring in most other provinces. Continued uptake in child vaccination rates is critical to ensure child-care centres can open safely in the weeks ahead, and then schools in September.

A second concern is that enhanced Employment Insurance (EI) and Canada Response Benefit (CRB) payments disincentivize low-skill workers to search for and accept low-wage jobs. Wage growth seems to have picked up in recent weeks, but earnings in the low-skill sector will often fall short of the EI or CRB benefits available. This implies that this group will, in economic parlance, be elastic in their labour supply – they will respond to changes in the relative economic benefits from drawing benefits as opposed to work. To address this challenge, Ottawa must resist calls for further extensions to enhanced EI/CRB benefit levels and instead focus efforts on increasing the generosity of EI’s working-while-on-claim (WWC) provisions as recommended in a recent IRPP analysis.

A greater concern, in our view, is the growth we have seen in long-term joblessness. As shown in figure 3 (below), as of mid-May, one-half of Canada’s two million jobless who say they want a job have been without one for more than one year. Moreover, only seven per cent of these people were enrolled in education or training in May 2021.

There is much evidence indicating that the longer workers are jobless, the less likely they are to return to work and the more likely they are to experience significant earnings losses when they do. This effect reflects a number of factors, but of particular concern now are skill atrophy, loss of work routine and lack of labour market engagement. Long-term or permanent labour market disengagement in this population has high social costs that justify ambitious investments now.

We also have acute concerns about the pandemic’s effects on Canada’s youth population. Workers aged 15 to 29 comprise 36 per cent of the jobless who want work and 30 per cent of those who have been without a job for more than one year.

As of May, there were 143,000 jobless youth seeking employment for the first time. Closed schools and workplaces have compromised the learning and work experience of young people. Labour market discouragement of middle-aged workers is costly. Youth disengagement is a much more serious problem.

The hope in March 2020 was that in-person work activity would pause for a few weeks, but we would soon press “play” and return to our old jobs. But economies are organic, constantly evolving, and we have now been on pause for 15 months. Workers and consumers have changed their spending habits, living arrangements and found alternative income sources, while employers have exploited opportunities to reorganize and automate. This suggests there may be structural shifts in labour demand, requiring reallocation of workers across sectors and new investments in human capital.

In a recent IRPP study, researchers from Statistics Canada, René Morissette and Theresa Hanqing Qiu, found that three-quarters of Canadian workers laid off following the 2008 crisis who had not found a job by 2010 did not use any of the four adjustment strategies they examined: move to a region with more jobs; enroll in post-secondary education; enroll in a registered apprenticeship; or become self-employed. Among the low-skilled workers, who in this crisis have been most affected, the use of these adjustment strategies was even rarer.

Given this evidence, we see a role for governments to support jobs recovery through active labour market programs (ALMPs) that prioritize labour supply engagement over job-creation. Meta analyses of ALMPs show they have larger average impacts in periods of high unemployment, especially when downturns have been relatively short-lived.

First, provincial governments need to step up efforts to intensify job search assistance, counselling and support services, thus providing labour market information for the jobless and incentives to enter work quickly. Evidence shows that these “work first” ALMPs are most successful in producing short-term beneficial impacts after a deep recession. Given the real possibility of widespread labour shortages this summer, these programs offer a cost-effective tool to boost job-creation in the short run.

Second, and arguably more significant, it is critical that structural labour market shifts be monitored and job reallocation pressures supported through “human capital” ALMPs, including private hiring subsidies as well as training on the job and in the classroom. Relative to “work first” programs, these programs can produce longer-term beneficial impacts on workers’ employment rates and earnings. They also tend to have relatively large benefits for women and the long-term jobless.

In this regard, the Canadian Recovery Hiring Program (CRHP), available from June 6 to Nov. 20, may be especially effective if it is used to attract workers, through sign-on bonuses or for training, for example. Restricting CRHP eligibility to employers who recruit long-term jobless applicants and requiring employers to reimburse a share of subsidies if workers are not retained for one year, would have been a preferred approach in our view.

There is much reason to be optimistic that we will see strong employment gains in the second half of 2021. However, we see risks in complacency. To support a full recovery, we need to ensure workers see an incentive to return to work and that they are supported in their transitions through job search assistance and human capital investments. For our youth and the long-term jobless, who are at greatest risk of long-term withdrawals from the labour force, modest policy efforts now can have big returns on the productive capacity of the economy in the long run.

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Fabian Lange
Fabian Lange is the Canadian Research Chair in Labour and Personnel Economics at McGill University. Since March 2020, he has tracked the performance of the labour market in Canada and the U.S. in the face of the pandemic. Twitter @fabolange
Mikal Skuterud
Mikal Skuterud is a professor of economics at the University of Waterloo. For the past year he has been tracking the labour market impacts of the COVID-19 pandemic and its potential long-term effects. Twitter @mikalskuterud

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