RBC economists warn Canada's aging population and immigrants working beneath their potential will see the current labour shortage outlive a potential recession in 2023.
Canada's unemployment rate fell to 4.9 per cent in June, the lowest since comparable data started in 1976. Tight labour conditions span every industry and sector, according to bank economists Nathan Janzen and Claire Fan.
By October, they predict the Bank of Canada will have raised its policy interest rate to 3.25 per cent, enough to tip the economy into a "moderate recession" in 2023.
Canada's central bank delivered a larger-than-expected rate increase earlier this month. Governor Tiff Macklem says the Bank is front-loading increases to avoid higher rates down the road, which will bring the policy rate "quickly to the top end or slightly above the neutral range," between two and three per cent.
"That'll ease near-term pressure on businesses struggling to hire," Janzen and Fan wrote in a research note on Wednesday. "But the root of Canada's labour crunch predates the pandemic, and will outlive the next downturn as well."
They point to the retiring baby-boomer generation, a disruptive labour trend over the past 10 years that they estimate is only about half-way complete in Canada.
"By the end of this decade, labour force participation is expected to fall to levels not seen since the 1970s," the economists wrote. "The lower the labour force participation rate, the more severe the economic and fiscal strains will be."
Janzen and Fan say Canada needs an "infusion of immigration" to offset a working-age population (15-64) that has been shrinking for nearly a decade.
While Canada has actively recruited skilled immigrants, RBC says those with a university degree and above are 43 per cent more likely to work in jobs that don't require this level of education, compared to Canadian-born workers.
Other levers to improve productivity cited by the bank include improving childcare affordability and encouraging businesses to increase capital spending on machinery and equipment.
"Over the long run, an ongoing flow of immigrants, better integration of their talents and rising capital investment will prove key in successfully addressing the issue of systemic labour shortages in Canada," Janzen and Fan added.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.