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Canada's Unemployment Rate Headed Lower: CIBC

Absence of wage pressures means Bank of Canada will let economy run

TORONTO, Nov. 7, 2013 /CNW/ - Demographic and policy changes mean Canada's unemployment rate has room to drop much further before we'll see pressure on wages that could trigger inflation, finds a new report from CIBC World Markets Inc.

The report notes that historically, today's 6.9 per cent unemployment rate would already be generating wage and price pressures. In both 1999 and 2005, the Bank of Canada declared the economy had exhausted economic slack and reached full employment at essentially the very same jobless rate. In both cases, the Bank raised interest rates to cool the country's overheating economy.

"But full employment ain't what it used to be, and that's good news for job seekers," says Avery Shenfeld, Chief Economist at CIBC. "Demographic and public policy changes in recent years have lowered the non-inflationary rate of unemployment. That will allow the Bank of Canada to keep rates low for long, and press ahead towards further labour market improvements."

Mr. Shenfeld notes that, unlike the U.S., where millions of discouraged workers have given up searching for work and no longer count among the unemployed, discouraged workers excluded from the jobless count represent only 0.1 per cent of Canada's working-age population. Those saying they want work but aren't in the labour force represent the same 2 per cent share that they did when the output gap was zero in 2005.

While the participation rate has dropped, he adds that's solely due to shifting demographics, as a greater share of the population reaches retirement age. If the population shares of each age cohort are held constant, the participation rate would have been rising since the recession, as other than youth, each demographic group's participation rate has been steady or rising.

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