How Bank of Canada key interest rates affect labour market, hiring trends

The recent Bank of Canada (BOC) decision to cut its key interest rate to 4.25% reflects ongoing efforts by the central bank to stimulate economic growth amid rising unemployment and slowed job creation.

While these rate cuts are intended to boost household spending, business investment and, ultimately, job growth, experts warn that the recovery will be gradual — and when it comes to hiring, businesses will be playing a bit of a game of who-blinks-first.

“That's part of the problem, is that it's one of those things where each firm is kind of waiting for other firms to start doing something,” says Philippe Cyrenne, professor of industrial organization and public economics at the University of Winnipeg.

“The federal government is tapped out,” he adds, explaining how pandemic spending is still having ripple effects.

“They spent so much that there isn't really a huge room for them to continue to spend. So that's why it's going to take a little bit longer, because usually the government starts the process, by spending and getting economic activity going up.”

Unemployment, inflation mean ‘poorer’ employees

With the unemployment rate now at 6.6%, a seven-year high outside pandemic periods, employers are facing unique challenges as employees have less to spend with the same pay, Cyrenne says.

“We went through an inflationary period, where the price level is almost 20% higher than it was before the COVID period … nobody got 20% salary increases in the last few years. So, people have gotten actually poorer in this period,” he says.

“Whenever people are poorer, they don't spend lots. So, essentially, what needs to happen is for wages to start to recover, and prices need to moderate so people feel a little bit better about spending again.”

Bank of Canada on 'straightline path' toward two more cuts: Scotiabank's Holt — via @financialposthttps://t.co/FnsOSY9XQW pic.twitter.com/wa9E5F5yFz

— Ottawa Citizen (@OttawaCitizen) September 10, 2024

Wage negotiations

As the Bank of Canada continues to cut rates, some businesses may find relief in wage pressures. However, Cyrenne cautions that existing employees, especially in high-cost-of-living areas, may push for higher wages to compensate for inflation.

“I wouldn't be surprised if there's pressure on employers from the existing employees saying, ‘Look… prices are 20% higher, but we haven’t got a 20% raise.’”

Randall Morck, professor of finance at the University of Alberta, emphasizes the uncertainty that unionized businesses face in balancing wage demands with hiring needs.

“Higher inflation generally means more conflict between the CEO and the union bosses,” he says, noting that HR leaders should be prepared for the possibility of increased labour disputes as wage negotiations become more contentious.

“The cost for the labour side of the economy of high inflation is prices go up, prices go up, then wages need to go up. Employers don't want to raise wages. Then [unionized workers think] ‘We need to go on strike.’ Then that messes up supply chains, which causes more problems for everybody else. And so, inflation is a big mess,” he says.

Pace of economy refresh will be slow, causing complications for HR

The challenge for HR professionals, who may be looking (or needing) to hire more talent with an economy that is “teetering on recession,” is convincing CEOs who are watching the bottom line, Cyrenne says.

Since economic recovery can take a year or longer to really take hold, employers will be slow to take on full-time employees—and this could have negative consequences for human resources professionals who often aren’t privy to the financial particulars of their organization.

“Businesses are forward-looking,” he says. “So, if you have someone coming to apply for a job, or before you post a job, you have to figure out, ‘OK, am I going to make enough extra income in this company to pay this person's salary?’ So that means, is there going to be enough work for that person to do going forward? So they have to see the economy start to rebound before they're going to go in and start hiring.”

While employers may be reluctant to commit to full-time hires during uncertain times, they often rely on part-time or contract roles to meet short-term needs. This approach allows businesses to remain flexible while they gauge the trajectory of economic recovery.

“What you really want to look at is whether the economic activity responds favourably to those interest rate reductions. As the economy starts to rebound, then firms will start to hire more,” Cyrenne explains.

Employers may face post-inflationary exodus of employees

A struggling economy may be experienced by some employers as a positive, because it means employees are more apt to stay put, but those same employees who felt stuck in their jobs due to economic conditions might quit when conditions improve, warns Cyrenne.

“Usually what happens is that when there are few opportunities — I'm not saying employers do this consciously — but there may be this idea that, ‘Okay, we can ask our employees to do certain things.’ But when the economy rebounds, then those are the people that are first to leave.”

He adds that employees experiencing burnout due to decreased hiring are often the most experienced or top performing talent, putting even more pressure on HR leaders to make careful hiring decisions while balancing wage demands in a challenging labour market.

“If you're an employer, you have to realize that maybe they don't have anywhere to go now, but when the economy starts to rebound, if they don't feel that they've been treated fairly, even within this limited period, then those are going to be the ones to go,” he says.

This will lead to organizations — especially banks and other financial institutions — relying on headhunting or poaching employees from other firms, making competition for talent during such a period even more intense.

“Often what happens when you come out and hiring starts, the first place that people look to hire people is from other companies,” he explains. “Whenever one bank starts to expand, the first place they look at are people in other banks. So then, you tend to see quite a bit of turnover, at least initially.”