Untapped potential in labour market key to fuelling expansion without inflation: Poloz

Galtero Lara
Marcha 13, 2018

Questions around the true level of the economy's potential growth rate is one of a number of uncertainties the central bank is taking into account as it rejects a "mechanical" approach to policy and remains cautious on interest rates, he said.

He added that encouraging more people into the workforce would also enable Canada to permanently raise its growth capacity without generating higher inflation. The Canadian dollar, which has been the worst performing major currency in the world this year as investors pared expectations for rate increases, fell another 0.7 per cent to $1.292 per USA dollar at 10:33 a.m.in Toronto trading. The central bank is forecasting inflation will remain near the bank's 2 per cent target over the next couple of years.

"The governor's choice of [speech] topics is in line with our view that he's looking for reasons to take rate hikes slowly", Canadian Imperial Bank of Commerce chief economist Avery Shenfeld said in a research note.

Poloz, in a speech Tuesday that focused on labour market slack, said the nation is at the "sweet spot" of the business cycle where growing demand is actually generating new capacity as companies invest to meet sales, a process he said the Bank of Canada has an "obligation" to nurture. "If less, that will create upside risk to inflation, and it is our job to balance those risks".

The biggest gain would come by raising the participation rate of prime-age women (those 25 to 54 years old) - now at 83 per cent versus the 91 per cent for men.

Mr. Poloz cited the example of Quebec, which has dramatically raised the participation rate of prime-age women to 87 per cent from 74 per cent over the past two decades by subsidizing child care and extending paid parental leave.

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"If we could simply bring the participation rate of prime-age women in the rest of Canada up to the level in Quebec, we could add nearly 300,000 people to our country's workforce", said Poloz, who noted the central bank has no role in implementing specific policies created to break down labour-force barriers.

Youth represent another source of untapped potential.

The federal government took a step in that direction in last month's budget by announcing extended parental leave benefits through Employment Insurance to encourage dual-parent families to share child care duties.

Poloz said that expanding Canada's labor force could increase the country's potential output by as much as 1.5 percent.

It's more complicated than just making more workers available.

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