National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, Associate Portfolio Manager and Wealth Advisor at NBF. I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed represent solely my informed opinions and may not reflect the views of NBF. The particulars contained herein were obtained from sources we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF.
The deteriorating fundamentals of the Canadian job market
July 27 2024 Insight from Eric Van Enk, Wealth Advisor & Associate Portfolio Manager
The deteriorating fundamentals of the Canadian job market
The most recent Canadian employment data was disappointing from several perspectives. The data for June (released early July) disappointed in terms of the number of jobs created as well as the overall unemployment rate which increased by 20 basis points to 6.4%. Most of this increase was due to Canada’s population growth (i.e. population growth outpacing job growth). I found this week’s chart interesting because it highlights what is known as the ‘law of diminishing returns’ in economics and provides insight into the near-term direction of the Canadian unemployment rate.
Canada: A majority of sectors have too many employees?
Production per employee (%change from Q3 2022 to Q1 2024)
Source: National Bank Financial
Investopedia defines the law of diminishing returns as, “a theory in economics that predicts after some optimal level of capacity is reached, adding an additional factor of production will result in smaller increases in output”. For example, a business can grow its sales by adding employees to a certain point, at which time, hiring additional employees does little (or nothing) to increase sales. This week’s chart segments the Canadian economy into sectors, highlighting ‘Goods’ sectors in red, while ‘Services’ sectors are highlighted in blue. The bars represent the change in productivity per employee from the third quarter of 2022 to the first quarter of this year. Notice all but two sectors (Transportation & Warehousing and Retail Trade) have shown a negative change in production per employee over that time frame. In other words, 15 of the 17 sectors of the Canadian economy are exhibiting the law of diminishing returns as it pertains to employees – additional employees are adding less to production / sales. This isn’t good and typically occurs as an economy crests. As the economy grows, businesses add more employees to help grow production /sales. However, at some point, the business reaches an optimal level of employees which means that for each additional employee hired, the company’s sales will increase by a decreasing amount (or not at all).
This employment statistic can be viewed as a leading indicator of future job creation or losses. Logically, if production gains per employee are positive as they are in the two sectors at the top of the chart, businesses in those sectors (Transportation & Warehousing and Retail Trade) have an incentive to hire more people. Conversely, businesses in the other 15 sectors of the economy have less incentive to hire because recent additions to their workforce haven’t meaningfully increased sales. Furthermore, businesses which are experiencing the law of diminishing returns for employees are likely to be the first to reduce their workforce if they experience a decline in sales (i.e. firing people may reduce costs more than it reduces sales).
What are your thoughts? I’d love to hear from local business owners on this subject – are you experiencing diminishing returns in your workforce, or do you see the potential to increase production per employee? Does the chart which shows trends at a national level ‘ring true’ to what you’re experiencing at a local level?
Eric Van Enk, Wealth Advisor & Associate Portfolio Manager
National Bank Financial – Wealth Management
Medicine Hat, AB
