Bank of Canada Governor says ready to let economy run hot to include more people in recovery

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“We can expect a long process of adjustment and a prolonged recovery”

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Sadie Tanner Mossell Alexander, the first African American to earn a doctorate in economics, observed in 1944 that black workers would be “the last to be hired and the first to be fired” unless the economy was at full employment .

The business profession is finally catching up, as policymakers such as Bank of Canada Governor Tiff Macklem and US Federal Reserve Chairman Jerome Powell are also focused on equal opportunities for marginalized groups. than on traditional concerns such as inflation.

Systemic racism still prevents ethnic minorities from participating fully in the economy unless white bosses are forced to choose between facing their prejudices or missing an order due to understaffing. Old gender roles force women to choose between careers and children. The long-term unemployed are victims of both atrophy and leaders conditioned to prefer poaching active workers to fill vacant positions, rather than taking a chance on someone who has been on the sidelines for six months.

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History and our own silly human behavior mean we continue to leave considerable talent on the bench – or in the stands. As a result, the economy is less productive than it could be, making it more difficult to balance the budget, reduce output gaps and meet inflation targets.

Macklem, who took over as governor of the Bank of Canada in June, puts inequality at the center of his policies, as did Powell in the United States and Christine Lagarde of the European Central Bank. On February 23, Macklem made it clear that he intended to let the economy run longer than most mainstream economists would have thought safe just a few years ago, both increasing the likelihood that interest rates will remain extremely low for at least another couple. years and that more people will eventually be able to participate in the recovery.

The reason: to test the limits of full employment in order to incorporate more people into the labor market.

Macklem noted that the unemployment rate had been unusually low for a long time before the pandemic, and yet inflation never took off. It could have been a fluke. But in case that’s not the case, Macklem said he and his deputies on the Governing Council had agreed to probe the limits of their previous understanding of the relationship between jobs and inflation. Pre-pandemic experience suggests that the central bank does not have to fear inflation as much as it has in the past, which would give policymakers a freer hand to spur economic growth. .

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“Based on past economic cycles, we would have expected inflationary pressure to start to increase,” the governor said in a virtual speech hosted by the Calgary and Edmonton Chambers of Commerce. “But inflation was not threatening to take off. As the pandemic recedes and the recovery continues, we will keep this experience in mind. ”

The unemployment rate fell below 6% at the end of 2017 and was on average 5.8% until governments shut down most of the economy in March 2020 to fight COVID-19 .

This level essentially corresponds to full employment, according to the Bank of Canada’s understanding of how the economy works. In other words, when the unemployment rate drops to this low level, central bank economists have long assumed that anyone who wants a job will have one and, therefore, growth will be such that inflationary pressures will start to build. .

But inflation never became a major concern during this entire period. The Consumer Price Index (CPI) has posted average annual growth rates of around 2%, which the Bank of Canada is required to achieve. The relationship between the unemployment rate and prices seems to have changed, so why not try to get a more complete job?

“There is a shared responsibility and monetary policy has a role to play,” Macklem said on a call with reporters after his remarks. “If we can all play this role, we can get Canadians back to work, we can expand the workforce, and we can achieve a full and shared recovery.” If we don’t, the recovery will be even longer. It will not be as shared and there will be less potential for growth in the future. “

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The Bank of Canada is benefiting from a trajectory cleared by the Fed. The US central bank cut interest rates three times in 2019, even as the economy continued to grow. Powell has been accused of courting trouble, and he could still face a market bubble collapse. But the unemployment rate had fallen to 3.5% on the eve of the pandemic, the lowest since the late 1960s. Millions of blacks and other marginalized workers found jobs, and inflation remained low. sleep.

Inequality is not as bad in Canada as it is in the United States, but it is still a problem. “Some measurements suggest that Canada is among the best jurisdictions for inclusion and equity in the distribution of education and acquired skills,” a new report from the Brookfield Institute for Innovation and Entrepreneurship said, “but inequalities Disturbing issues persist, and many face barriers to using their skills in the labor market, leading to stubbornly high levels of income and wealth inequality. “

Women in Canada are 17.5 percentage points more likely to have a post-secondary degree than men, yet the gender pay gap has barely changed in decades, Brookfield study finds . About 71% of non-Indigenous Canadians aged 25 to 34 have obtained a certificate or diploma beyond high school, compared to 29% for Blacks and 40% for First Nations.

Macklem’s latest remarks suggest that policymakers are prepared to take these types of divisions at least as seriously as inflation. The unemployment rate was 9.4 percent in January, a far cry from full employment no matter how you measure it. “The economy will need support for a while, and the bank will continue to do its part,” he said.

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