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The job market is still red-hot, giving central bankers lots to worry about

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With seven interest rate hikes since March, the Bank of Canada has cranked its policy rate from 0.25% to 3.75%, raising borrowing costs at the fastest pace in decades and sparking fears of a recession. What Canada’s central bank hasn’t been able to do, however, is significantly curtail red-hot labor markets.

In its two most recent quarterly monetary policy reports (MPRs), the bank has published something of a scorecard for Canada’s job market, tracking various measures of labor activity—including unemployment and employment rates, vacancy rates, and business-reported labor shortages—against their historic highs and lows, along with the benchmark performance for each metric (as indicated by the shaded bars on the chart). If a current reading is below the benchmark range, it points to weakness; if it’s above that benchmark, you’ve got a job market powering beyond expectations. The sweet spot is somewhere in the middle.

With almost every measure near historic highs, the labor picture is close to the tightest it’s ever been. Or, as the bank put it in the MPR released alongside its October rate hike of 0.5 percentage points, Canada’s job market “has surpassed maximum sustainable employment.” That, in turn, has helped push wages up over the past six months. While paycheques have trailed the rate of inflation—meaning workers have been subjected to ongoing pay cuts—the central bank’s great fear is the specter of a wage-price spiral, in which rising prices cause workers to demand higher wages, driving up costs and rising prices even further.

The good news—if you’re an inflation-fighting central banker—is that hikes are starting to take their toll, albeit slightly. Between the July and October MPRs, unemployment rose slightly to 5.2% from 4.9%. Hence the bank’s decision to go with a smaller hike than the three-quarter-point increase markets were expecting, which reflected its new view that the economy will “stall” in the coming months.

Still, as scorecards go, expect this one to remain volatile. It’s not just that labor-market measures like the unemployment rate are lagging indicators that follow growth and typically only climb sharply after a recession has already begun. But the participation rate—the only scorecard measure to be at the bottom end of its benchmark range—is likely to keep falling as Canada’s aging workforce retires, adding to a labor market that’s too tight for the Bank of Canada’s liking.

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