The Canadian labour market has weakened in recent months, with the unemployment rate reaching 7.1 per cent in August, its highest level since 2016. The situation is even worse for younger people. At 14.5 per cent in July, the unemployment rate for this cohort of workers has been the highest since the early 2010s.

If it were not for many young people, likely discouraged by their job prospects, dropping out of the labour force, with the participation rate of this cohort reaching lows not seen since 1998, their unemployment rate would be closer to 18 per cent.

Most unemployed young people tend to have attained a lower level of education — high school diplomas or less — but the unemployment rate for holders of university degrees is reaching levels not seen since the 1990s recession.

Recent job vacancy data indicates the number of unemployed individuals per job vacancy requiring a university degree is significantly higher than in other categories, suggesting that new graduates are facing a tough labour market.

What explains the weakening of the youth labour market and what will be the consequences?

The rising unemployment rate is the result of weak hiring due to modest economic growth. As such, layoffs in the economy have remained low, while strong population growth in recent years has led to a surge in entrants to the labour market competing for fewer openings.

In addition, while layoffs remain low for younger cohorts, they are also the first to be affected when a hiring freeze is implemented. As a result, employment gains for the younger cohorts underperform.

Many have blamed foreign temporary workers for the high youth unemployment rate. However, while there appears to be a correlation between the rise in youth unemployment and the increase in temporary foreign workers, it is essential to take a more holistic view of the labour market before drawing such conclusions. The unemployment rate for recent immigrants has also increased over the period and labour mismatch could also be playing a role.

The hypothesis that the rise in non-permanent residents is the reason for increased youth unemployment will soon be put to the test, as the number of non-permanent residents is rapidly declining and is expected to continue doing so in the coming quarter.

Artificial intelligence (AI) is also impacting the current situation. A recent report by the Organization for Economic Co-operation and Development (OECD) said young workers are more at risk of being displaced by automation since their jobs are more likely to involve routine and/or repetitive tasks.

This trend could be accelerated in the current challenging macroeconomic environment, as businesses may be keener to save on costs by adopting AI rather than hiring. Job losses due to AI are similar to the fate of weavers in the United Kingdom during the industrial revolution or North American manufacturing jobs in the face of globalization.

While industries disrupted by new technologies will have fewer jobs, there will be gains in other areas, and the net effect is likely to lead to job gains. But it also creates winners and losers, exacerbating the inequalities between those who benefit or adapt to the change and those who don’t.

The implications of elevated youth unemployment will be what is called “labour scarring.” Many studies have concluded that individuals entering the workforce during a recession tend to have an income that is approximately 10 per cent lower compared to those hired during “good times.”

What is even more worrisome is that this gap persists for most of their career. The lower income is not only due to lower entry-level salaries offered; it is often the result of accepting jobs for which they are overqualified or in different fields, resulting in a shift into lower-paying industries.

Weaker income at the early stage of their careers, in the context of the current cost-of-living and affordability challenges, means that many young people will have to delay the next steps in their lives, such as moving out of their parents’ home, buying a house or starting a family.

As a result, people entering the workforce during recessions experience delayed promotions, reduced mobility across work opportunities and often see a reduced lifetime wealth accumulation.

If the income underperformance is widespread, it could also have broader implications for the economy.

As the general population ages and the proportion of retirees increases, a greater share of public-service financing will fall on younger generations. Long-term income underperformance will reduce a government’s capacity to raise the revenues necessary to provide public services, potentially necessitating higher taxes or spending cuts than would have otherwise been the case.

We have seen a higher youth unemployment rate in the aftermath of previous recessions. However, the current situation differs in that the younger generation simultaneously faces additional challenges. The risk is that the longer the situation lasts, the more the younger generation will lose faith in their future and despair.

Despair and increased inequalities, within and across generations, are an explosive cocktail that could lead to a generation turning to radical answers to their economic problems.

History suggests the labour situation will improve for young people as economic activity improves, but it may take years. In the meantime, policymakers will need to keep the younger cohorts in mind and adopt policies to ensure the unemployed are not left behind and reoriented to contribute to society.

  • The thorny dilemma of Canada’s temporary foreign workers
  • Will the rise of ‘bleisure’ travel survive the return to the office?