Where Did All the Workers Go?

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These days you’d be hard pressed to walk by a storefront and not find a help wanted sign in the window. For many Canadian firms, pent-up demand and the easing of pandemic restrictions mean business is back, but the workers are not.

At one time, income support programs such the Canada Emergency Response Benefit were blamed by some for keeping workers out of the market. This may have been a factor in 2021 but it isn’t today. The truth is, there just are not enough workers to fill all the vacant jobs; in the first quarter of the year, the job vacancy rate was 5.6 per cent. This looks to be a problem that will continue for at least the next five years.

The results are being felt by both customers and businesses. On the customer side, a worker shortage can mean longer wait times, fewer services, poorer product or service quality and more. On the business side, it can mean reduced operations, lower revenues, wavering employee and customer loyalty and greater employee burnout. It’s a lose-lose situation.

What’s really behind the worker shortage and how can businesses adapt to the new facts on the ground? Smith Business Insight looked for answers from Smith operations strategy expert Barry Cross and equity and inclusion researcher Eddy Ng, as well as economist Huw Lloyd-Ellis from Queen’s Economics Department. Here’s what we learned.

What is driving the worker shortage?

Huw Lloyd-Ellis: The dramatic increase in market tightness in 2021 and 2022 is, in large part, a result of the rebound in demand. Countries that provided generous government support to replace lost income during the pandemic, including Canada and the U.S., have experienced relatively strong subsequent rebounds (and high inflation).

While the apparent rebound in demand following the lockdowns, combined with recent rising oil prices, have dramatically exacerbated the Canadian labour shortage, in many industries the labour market was already tight in 2019 relative to previous years. It’s a phenomenon that is not restricted to Canada but characterizes several other OECD countries, and likely reflects common factors affecting multiple countries.

Eddy Ng: If you unpack the latest employment report from Statistics Canada, you will find the unemployment rate across all age groups declined, but the labour market participation rate dropped for workers over 55. In other words, there are fewer workers over 55 either working or not looking for work. They have left the workforce altogether and are not coming back.

The pandemic recovery also created an explosion in economic growth driving up demand for more workers across all sectors but particularly acute for sectors that were hit hard by the pandemic and making a comeback. That’s the second half of your explanation. 

Barry Cross: Layoffs, work stoppages and, honestly, challenging working conditions related to the pandemic led many people to re-evaluate their career needs and objectives. In effect, COVID altered the genetic code of society. We saw enrolment levels increase at Smith as some decided to pursue further education. In other cases, work-from-home conditions appeal to some employees and they gravitated towards work they could do remotely.

What industries are most affected by the worker shortage?

Lloyd-Ellis: The oil and mining sectors, the construction sector and professional, scientific and technical services have all reached market tightness close to four times that experienced during 2015 to 2018. Significant labour shortages are also observed in manufacturing, real estate, finance and utilities.

Interestingly, the implied labour shortage in accommodation and food services appears to have lessened by 2022 after being particularly acute last summer. Accommodation and food services, retail trade, health services and transportation and warehousing are experiencing labour shortages but to a lesser extent than other industries.

How long can businesses expect the labour storage to continue? 

Cross: While the severity should lessen and conditions improve for employers over the next year, this feels like a long-term challenge. Think about that “Service Couple”, where one partner worked in retail and the other in hospitality. Families like that were clobbered by the pandemic, and many realized they need to look at their career choices to provide more stability. This will be good for some industries and more challenging for others.

Ng: The labour shortage will be prolonged until additional workers enter the labour market or we bring in technology to fill the gap. Some “high-touch” jobs cannot easily be replaced by automation, robots or AI. This will prolong the shortage even longer as training and development will require additional lead time before workers can perform at the required level. 

Even if we are able to plug the demand created by the current economic growth, we know that we have an aging workforce with impending large-scale retirement. We need a strategy that goes beyond the current pandemic-induced shortage.

Lloyd-Ellis: The labour shortfall due to the ongoing retirement of skilled and experienced workers will remain a significant factor in key industries for some time to come. And as competition for the remaining workers heats up, it is likely to result in wage increases and further inflationary pressure.

What can businesses do to minimize the impact on business operations and existing employees? Are there tools or processes businesses can leverage to help?

Cross: First, most businesses need fewer people than they believe. If you are not slightly understaffed, you are overmanned. Being understaffed lets your stars and high potentials rise to the top. Most businesses I have studied in the past have enough people, but resources are wasted in poorly designed processes and services.

Second, understand where the organization creates the most value. If resources are constrained, you may have to discontinue some services or products and gently let some customers go. Focus on creating value for your best customers.

Ng: For starters, businesses and employers need to retain existing employees to prevent further erosion of the workforce. You need to take care of your best employees first. In the short term, hire people you normally wouldn’t hire (for example, those who may only be able to do 50 or 70 per cent of the job) and train them to be fully functional. 

If they identify a future skills shortage that cannot be filled or outsourced, businesses will need to invest in training and development to address their future skills needs. Workforce planning is helpful when you can’t predict the future. This ensures that businesses have the right people—with the right skills—at the right time. 

Is there anything government can and should do to combat the labour shortage?  

Lloyd-Ellis: Ultimately, the short-run economy-wide increase in market tightness will be mostly reduced via a slowdown in demand. Macroeconomic policies that are tightening both monetary and fiscal stimuli are already underway. It is hoped that these can counteract an overheated economy without causing a recession.

In the long run, however, structural labour shortages can only be relieved by either discouraging retirement of skilled and experienced workers or replacing them in some way. For a country like Canada, a major source of skilled and experienced workers could come from immigration. We already have ambitious targets in this regard, but achieving these goals is currently being undermined by application processing times that themselves appear to be exacerbated by labour shortages!

Ng: The government will need to ramp up its efforts at attracting immigrants with a broad range of skills to Canada, not just highly skilled workers. It’s worth acknowledging that Canada is also competing for the same pool of migrants with other countries facing the same (aging workers) crisis. The government can shift its strategy and focus on training workers with higher unemployment such as young workers, racialized migrant workers and workers with disabilities.

The government can also put in place strategies to retain older workers in the workforce longer and delay their retirement. This may include delayed yet larger pensions, flexible work and re-tooling for jobs in the new economy.

Cross: Government’s role here is long term, addressing the access and availability of workers in various industries and fields. Canada has a geography problem, which means we likely need in the order of 50 million people in the country to afford to properly invest without taxing people and corporations unreasonably. 

What could government do specifically?

• Support high-speed rail between Quebec City and Windsor and between Edmonton and Calgary. Give people the ability to commute and travel quickly and reliably.
• Support high-speed internet everywhere. Consider publicly funded towers and infrastructure to eliminate redundancy and investment by the telecoms, ideally bringing down rates that are among the highest in the world. This facilitates work-from-anywhere strategies.
• Eliminate caps on healthcare professional training to improve capacity. Healthy workers are more productive.
• Promote and support education for trades.
• Partner with industry and universities in world-class work in productivity research and training.

Each point here facilitates people working, and working well.  This is where we start to get a sense of what Canada can be best at.