Canada’s ‘roaring’ recovery is not as robust as it seems

Only 15 percent of job growth relative to February 2020 is in the private sector—a worrying sign

A sign announcing hiring sits at the General Motors facility in Oshawa, Ontario on Monday April 4, 2022. Frank Gunn/The Canadian Press.

One of the major questions of the pandemic-induced recession was about the magnitude and mix of the subsequent economic recovery. Would it be a U-shaped recovery? Or a W-shaped recovery? Or an L-shaped recovery? And where would the jobs come from? Which sectors would ultimately drive the recovery? 

That Canada’s economy fully restored the jobs lost during the pandemic by late 2021 seemed to answer these questions. Headlines and commentaries declared that “Canada’s pandemic jobs recovery has been remarkable” and  “Canada’s labour market bounces back.” 

The Trudeau government was even more affirmative: its 2021 economic and fiscal update, for instance, boasted that the economy was “roaring back” based on recouping 106 percent of the jobs lost during the pandemic.1Chapter 2: The Road to Recovery https://budget.gc.ca/efu-meb/2021/report-rapport/chap2-en.html 

Yet these top-level claims require a deeper dive into what’s really behind Canada’s post-pandemic recovery. The data tell us a less favourable story than the prevailing narrative in the media or from the government. Much of Canada’s post-pandemic jobs recovery—indeed, nearly 85 percent since February 2020—has actually been concentrated in the public sector. We have experienced a G-shaped recovery: a government-centric recovery.  

Start with Statistics Canada’s latest monthly jobs report.2Employment by class of worker, monthly, seasonally adjusted and unadjusted, last 5 months (x 1,000) https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410028801 (New data, including for the month of June, will be released on July 8). As Chart 1 shows, Canada’s labour market has indeed recovered jobs lost after the onset of the pandemic. 

Specifically, overall employment reached 19.297 million in November 2021, surpassing the pre-pandemic employment level of 19.143 million in February 2020. As of May 2022, the latest month of currently available data, total employment was 19.640 million or 2.6 percent higher than in February 2020, the month before the pandemic shook the country’s job market. 

Graphic credit: Janice Nelson

Yet Chart 2 breaks out total employment into three components: public sector employment, private sector employment, and self-employment. This disaggregation of the employment data is notable for three reasons: 

  1. The pandemic-induced drop in public-sector employment (red line) was much less severe compared to the private sector (blue line)—6 percent versus approximately 22 percent. This was to be somewhat expected because lockdowns disproportionately affected businesses that had to temporarily shut down or scaled back operations while the need for certain front-line public sector workers such as nurses and other health-care professionals remained unchanged. 
  1. Public sector employment recovered much more quickly. It took just seven months for public sector employment to reach or surpass its February 2020 levels. Private-sector employment, by contrast, took much longer to recover, requiring 20 months to reach its pre-pandemic levels. 
  1. Self-employment is still below its pre-pandemic level and has yet to recover. 
Graphic credit: Janice Nelson

The ongoing discrepancy between the public and private sectors is heightened if one adds the self-employed to private-sector workers. Chart 3 shows that total private sector employment (including self-employment) took 24 months to surpass its February 2020 level—more than three times the duration for the public sector. 

Graphic credit: Janice Nelson

Another way to show these compositional employment trends is to compare job growth in the public and private sectors in relative and absolute terms. Table 1 summarizes the change in employment levels for each sector from February 2020 to May 2022. Public sector jobs have grown by 418,400 (or 10.7 percent) since February 2020. Total private sector employment (including the self-employed) has only grown by 78,300 or 0.5 percent higher. 

Put differently, of the net increase in total employment over the period (496,700), 84.2 percent of the incremental jobs were in the public sector while only 15.8 percent were in the private sector. As a result, Canada now has a greater share of its workers employed by the public sector than did prior to the pandemic: 22.0 percent in May 2022 versus 20.3 percent in February 2020.

Graphic credit: Janice Nelson

Why does this matter? 

As a starting point, it paints a different picture of the labour market’s recovery than is commonly understood. Were it not for a significant spike in public sector employment at a time of unprecedented public spending and borrowing, the government’s rosy narrative about the economy “roaring back” would be replaced by legitimate concerns about a jobless recovery. 

Yet, with a greater share of public-sector jobs compared prior to the pandemic, one might question the sustainability of Canada’s labour market rebound. As the federal and provincial governments aim to deal with their large-scale deficits and debt, is it possible to sustain more and more public sector jobs?  

Of course, some of the recent growth in public sector jobs may reflect a temporary spike in response to the pandemic. Yet it’s worth recognizing that, compared to February 2020, 121,000 (or nearly a quarter of the 418,400 incremental public-sector jobs) are classified as “public administration.” This suggests that a considerable share of these new hires isn’t necessarily on the front lines of the pandemic response and cannot be characterized as merely COVID contingent. 

Controlling public spending and reducing deficits on one hand, and sustaining the country’s jobs recovery through deficit-financed public-sector hiring, on the other hand, is a major challenge for Canadian governments that has gone under-discussed because of the tendency to focus on the top-line employment numbers. It may prove to be the public policy equivalent of jumping a chasm in two bounds that will expose the country’s weak labour market as public spending is curtailed. 

The timid recovery of private-sector jobs is important to recognize here. That only 15 percent of job growth relative to February 2020 is in the private sector is a worrying sign about the underlying robustness of Canada’s economy. A G-shaped recovery can mistakenly seem like a U-shaped recovery. 

More fundamentally, though, there’s a political economy dynamic that policymakers ought to be more cognizant of. The significant expansion of the government’s payroll—particularly for non-COVID front-line related work—during a period when the self-employed and other private-sector workers have faced job precarity and even lay-offs, seems to fail a basic fairness test. There’s something inherently unfair about adding to the long-term tax burden of businesses and households that have already been saddled with government-mandated shutdowns, pay cuts, job losses, and now rising inflation. 

This unfairness risks exacerbating the nascent divide between what Globe and Mail columnist John Ibbitson has described as “the public class, who live on the avails of taxation, and the private class, who pay the taxes.” We risk ending up with something like the old “makers” versus “takers” debate, which, though a highly imperfect way to think about the economy and society, may find new resonance with small business owners and precarious private-sector workers. 

This divide was already notable prior to the pandemic. Consider, for instance, that after falling by 7.6 percent between 2011 and 2015, the number of federal public servants increased by 16 percent between 2016 and 2020.3Population of the federal public service by department https://www.canada.ca/en/treasury-board-secretariat/services/innovation/human-resources-statistics/population-federal-public-service-department.html Private sector employment (including self-employed workers), by contrast, grew by just 1.9 percent over the same period.

It’s not just differences in hiring rates either. Research by the Fraser Institute (and others) consistently finds a wage premium for public-sector workers in Canada. Even after controlling for factors like gender, age, marital status, and education level, Fraser Institute scholars estimated a 9.4 percent wage premium, on average, for public-sector workers over their private sector counterparts in 2018.4Comparing Government and Private Sector Compensation in Canada, 2020 https://www.fraserinstitute.org/studies/comparing-government-and-private-sector-compensation-in-canada-2020 Adjusting for the relative levels of unionization still produces a wage differential of about 6 percent.

The overall compensation gap is far greater when one accounts for non-wage benefits such as pension and health benefits, job security, and typical retirement age. Just consider, for instance, that 87.7 percent of public-sector workers are covered by registered pension plans, compared to just 22.5 percent of private-sector workers.

Rising inflation is bound to exacerbate these differences. Public-sector unions are increasingly calling for large wage increases to account for inflation while many small business owners and other private-sector workers struggle to keep up with rising prices without cost of living adjustments. 

The key point here is that the growing divide in the experiences of public and private sector workers in Canada (which we’ve previously written about at The Hub) risks creating a new fault line in Canadian politics and society. It’s a fissure that’s bound to become even wider in the future as government spending becomes more unsustainable and the private economy is further held back by labour shortages. 

The long-term outcome could be a new political consciousness based on one’s membership in the public class (which earns more, has better benefits, and greater job security) or the private class (which faces more precarious work, fewer benefits, and less security). 

The lasting effects of our G-shaped recovery, in other words, may be felt less in an economic sense and more in our political life. It’s important therefore that we start to take notice of what’s actually happening before it is too late.

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