Shoring up a dwindling workforce*
Canada’s labour supply will decline over the next 10 years – and even more so over the next 50 –
unless we start to take action now
By Terence Yuen
*This is an expanded version of a summary that originally appeared in the December 2006 issue of
CAmagazine.
In 50 years, will there be fewer CAs in Canada? That could be a logical question to ask, given Statistics
Canada’s population projections for the next half-century. In 2056, StatsCan expects those aged 65-plus as a
share of the total working-age population to jump to more than 30% from 15% in 2006. Even over the next
decade, labour supply growth will start to dwindle as more baby boomers approach retirement age. This could
result in a labour shortage.
Failing to resolve the shortfall in the Canadian workforce will result in stagnant economic growth and
fewer improvements in living standards than we have experienced in the past couple of decades. The question
is, where can Canada find more workers? Three common solutions are offered in the literature:
- promoting participation among older workers
- increasing immigration
- enhancing labour productivity.
Watson Wyatt has conducted considerable research to examine labour shortages and the extent to which
various solutions can mitigate their effects in Canada.
Baseline estimation of one million workers by 2016
Canada’s standard of living, commonly measured as real gross domestic product (GDP) per capita, has
been improving steadily at an average annual rate of 1.85% over the past three decades. Do we have enough
workers to support the same improvement in future?
Based on Statistics Canada’s population projection for 2006-2056, we would not have enough workers to
support a continued improvement of living standards at 1.85%. The Canadian labour market is expected to
experience substantial labour shortages of more than 100,000 workers by 2009. This figure is estimated to
grow to one million in 2016.
These estimates are based on four assumptions: constant participation rates for various demographic groups
for 2006-2056, no further decline in average weekly hours worked, long-term unemployment gradually falling to
the “full employment” level of 6%, and labour productivity growth maintaining the 1.5% historical annual
rate.
To what extent can the Canadian government and businesses mitigate the severe labour shortages by altering
some of the baseline assumptions?
Promoting workforce participation among older workers
Encouraging baby boomers to extend their careers is a good strategy for adding more workers to the
Canadian labour force. Since the mid-1990s, the number of 55- to 64-year-olds in the working world has picked
up considerably (see Exhibit 1).
Exhibit 1: Labour force participation rates of near-retirement group,
1976–2006
Following the rising trend in recent years, what would happen if labour force participation rates for both
men and women in the 55-to-64 bracket continued to rise by one percentage point a year from 2006 to 2010? An
additional 300,000 workers would join the labour force by 2016. As a result, we would not foresee the
substantial shortfall of more than 100,000 workers until 2012, which is three years later than under the
baseline scenario.
As baby boomers begin to retire in the coming years, effective strategies for retaining this group in the
workforce become increasingly important to workforce planning. The 2004 survey conducted by Watson Wyatt in
the US (Phased Retirement: Aligning Employer Programs with Worker Preferences) found one-third of respondents
between ages 50 and 70 would continue working longer than otherwise planned if they were offered a phased
retirement plan. Although the concept of phased retirement does not sound complicated in theory, the actual
design of an appropriate plan requires careful consideration. The challenge of offering phased retirement
programs in the Canadian regulatory environment is fully discussed in a 2002 article by Danielle Éthier and
Ian Markham (“Who Will Mind the Store? Keeping Older Workers Longer,” Benefits and Pensions Monitor) and
another from 2005 in the same publication (“Is Phased Retirement Really a Solution?” by Ian Markham and David
Burke).
Raising the immigration level to 1% of the total population
In addition to the domestic channel, attracting immigrants is another way to add more workers to the
Canadian labour market. New immigrants have always been an important source of labour force growth in Canada.
According to the 2001 census, close to a million immigrants who arrived in the 1990s participated in the
workforce, representing about 70% of the total growth in the labour force over the decade.
During the 1996-2005 period, an annual average of about 220,000 immigrants came to Canada, representing
0.7% of the total population. Raising the immigration target from 0.7% to 1% of the total population implies
that the annual number of immigrants would increase by about 100,000. Phasing in the 1% target within the
next five years would have a slightly larger mitigating effect on labour shortages than the 5% increase in
participation rates of the 55-64 group. Compared with the baseline scenario, labour shortages in 2016 could
be lower by 600,000 workers, after accounting for the fact that a sizeable fraction of the new immigrants
will not join the workforce.
Achieving the 1% immigration target is much more complicated than simply speeding up the application
process and clearing the backlog of thousands of prospective immigrants. For a relatively open immigration
policy to be successful, it is as important to determine the appropriate composition of skills as it is to
set the target level. In a “knowledge-based” economy, attracting highly educated people from other countries
becomes a major goal.
Recent immigrants are more highly educated than earlier immigrants. Forty-two percent of adult immigrants
arriving between 1996 and 2001 had a university degree compared with only 19% two decades ago. Integration
into the Canadian labour force is a necessary factor to convert the potential productive capacities of highly
skilled immigrants into economic growth. Recognition of pre-immigration education and credentials becomes
increasingly important. In the 2006 budget, the federal government announced it will increase immigration
settlement funding by $307 million. Another $18 million will be spent over two years as a first step in
establishing a Canadian agency for the assessment and recognition of foreign credentials.
Enhancing long-term labour productivity performance
If labour productivity growth were to maintain the 1976-2005 historical average of around 1.5%,
increasing older worker participation by 5% and raising the immigration level to 1% of the total population
would add about 900,000 workers to the labour market. This could eliminate a general labour shortage in
Canada over the next 10 years.
However, simply relying on immigration and older people will not provide enough workers to meet the labour
demand beyond 2016. We also have to improve our productivity, which is an alternative way of expanding the
workforce. An average annual productivity growth rate of 1.75% or above is necessary to support a
standard-of-living improvement that is sustainable in Canada for the next 50 years.
Is 1.75% an achievable target for Canada?
Increasing concerns have been raised about Canada’s dismal performance relative to the US over the past
two decades. Exhibit 2 illustrates the index of relative labour productivity, defined as the ratio of
Canadian to US productivity, using 1985 as the base year. A declining ratio means labour productivity in the
Canadian business sector has fallen by about 20% relative to the US since 1985. More importantly, the
Canada-US productivity gap widened substantially from 10% to 20% after 2000. During the period 2001¬2005,
labour productivity growth in Canada was averaging 1% a year, well below the 3.3% in the US.
Exhibit 2: Relative Canada-US labour productivity
index (1985 = 1), 1985–2005
No one can pinpoint precisely why labour productivity in Canada has fallen behind the US to such an alarming
extent in the post-2000 period. Various factors appear to have played a role. Canadian researchers in general
find it is too early to interpret the recent dismal developments as a permanent downward shift in long-term
productivity growth. A consensus is emerging that the long-run average growth rate will return to the 1.75%
to 2% range. All survey participants in the Watson Wyatt Survey of Economic Expectations conducted at the end
of 2005 predict that Canadian labour productivity will recover, with a median at 1.6% in 2006 and 2% over the
medium and long term. This is consistent with the Bank of Canada’s estimate in the October 2005 issue of
Monetary Policy Report.
The fundamental challenge is whether something can be learned from the US experience to boost Canada’s
productivity performance going forward. A common argument is that information and communication technology
(ICT) has served as a major breakthrough in general-purpose technology, boosting labour productivity after
1990. Many studies have indicated that the acceleration of labour productivity growth in the US occurred not
merely in ICT manufacturers, but also in ICT users. John G. Fernald and Shanthi Ramnath show in “The
acceleration in US total factor productivity after 1995: The role of information technology” (Economic
Perspectives. Federal Reserve Bank of Chicago, 2004) that some large US retailers, most notably Walmart, take
advantage of new developments in ICT and adopt innovative ways and methods in their management and in the
responsiveness of their supply chain to changes in customer demand.
An extremely important but often neglected point is that gains in productivity require more than just
purchases of new equipment and technologies. As noted in the 2004 McKinsey report , capital investment is a
necessary, but not a sufficient, condition for productivity improvements. An increase in capital intensity
does not guarantee that the capital is used efficiently.
An increasing body of economic research has found that the success of new investment and technology
adoption depends on managerial factors. To reap the full benefits of new technologies, workplace
re-organization and worker retraining are critical steps. Carol Corrado, Charles Hulten, and Daniel Sichel
have found that US business investments in human resource practices, also known as “intangible capital,” are
as large as in physical capital (see “Measuring Capital and Technology: An Expanded Framework," Board of
Governors of the Federal Reserve System, Finance and Economics Discussion Series, 2004-65). Canadian studies
by Turcotte and Rennison and Gera and Gu have also found that the combination of ICT use and human resource
management is associated with a higher incidence of productivity improvement.
A path to follow
The Canadian labour market is expected to experience substantial shortfalls over the coming years as
the baby boomers enter retirement. As shown in Exhibit 3, with assumption of labour growth at the historical
rate of 1.5%, the combined effect of raising the immigration level (1% immigration) and increasing older
people’s participation ([55-64 + 5%]) would largely eliminate a general labour shortage for the next 10
years. To have sufficient workers for steady standard-of-living improvements beyond 2016, labour productivity
growth must improve to at least 1.75% a year. Existing research concludes that the combination of excellent
human resource management strategies and ICT investment is crucial in adopting new technologies, enhancing
productivity and promoting financial performance.
Exhibit 3: Estimated labour shortages under various
scenarios
Another oft-cited solution is offshoring. Canadian companies may benefit from offshoring jobs to other
countries with abundant labour supply, such as China and India. Although the popular debate over offshoring
is concentrated on the corresponding job losses in the domestic labour market, little work has been done to
provide a balanced evaluation between short-term adjustments and the long-term creation of higher-end
products. The well-publicized layoffs in the manufacturing sector could be the first part of the transition
to higher-value jobs – the “creative destruction” process described by economist Joseph Schumpeter.
Offshoring might not be a zero-sum game and would be beneficial to both the developing and developed
countries in the long run.
To learn more about Watson Wyatt’s research on Canadian labour shortages, please visit
http://www.watsonwyatt.com/canada-english/pubs/specialmemoranda/default.asp.
Terence Yuen, PhD, is the research
economist at the Canadian Research & Innovation Centre of Watson Wyatt Worldwide.
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