The labour growth puzzle

Grrrr. I've switched to beta blogger and it's not being kind to me, hence the reason this post disappeared. One more time...

I'm stumped by this contradiction: October's net gain in employment was a whopping 51,000 (more than double expectations) despite poor GDP performance. What's up?

What analysts are saying isn't making sense. Here's CIBC's Avery Shefield:

Typically, employment growth lags the initial turn to slower economic activity, as businesses hoard labour for a while before bearing the costs of layoffs. That could be behind the stubbornly healthy trend in hiring of late, one that contrasts with poor GDP growth in Q2 and Q3.

Are we really seeing a case of job hoarding? Maybe in select businesses (construction), but elsewhere evidence suggests otherwise.

First, a quick backgrounder: 67,600 of the new jobs created were full-time jobs, while part-time employment fell by 17,100. Gains were both in goods (construction mostly) and services (educational services, business, building and other support services). The big dives occurred in manufacturing and the resource industry.

Here's why I can't understand how the 'job hoarding' reasoning stands.

1. The strongest reason (I think): A lot of the job gain in the service industry has been in educational services, support services and health services, resulting from an injection of provincial spending. It doesn't seem to me that these industries are hoarding labour.

2. We're seeing a sectoral shift to more productive sectors where hires seem long term. For example, the self-employed sector, typically made up of less productive low-wage earners in Canada, shrunk in the last two months as entrepreneurs joined other sectors.

3. The fabric of Canada, small and medium size enterprises (SME's), can sustain an economic downturn as cost burdens drop while incentives improve. SME's have reported their biggest burdens to be insurance premiums, less youth in the labour force, and the inability to find cheap part-time labour. Well, they must be cheering then. First, insurance is more favourable. Second, StatsCan says “full-time growth for youth was strong in October (+36,000)...” Third, downward pressure on wages will be a boon. Fourth, SME's have reported not being affected by external fluctuations, such as fluctuations in international trade. The businesses tied to external fluctuations (manufacturing) have already been cutting labour. In short, SME's are doing the hiring, and they're doing well.

5. Overall, firms are in a strong position. TD analysts in September:

One of the main reasons for this aggregate strength is that relative to previous periods of economic slack, the balance sheets of Canadian firms are extremely healthy and the level of operating profits remains near the record high set in the fourth quarter of 2005. As a result, the vast majority of firms are in a much better position to weather this economic downturn without resorting to layoffs or job cuts.

In sum, surely a small drop in labour can be expected (eg. in the construction industry), but not to the extent predicted in the next quarter or two. The problem is, if I'm right, and businesses aren't hoarding labour, why else would job growth be so out of whack with GDP growth? A new job growth equilibrium?

Anyone who regularly reads this blog knows that I break promises. I say I'll return to a subject and then I leave it for dead. I'll be coming back to this one when November's employment figures come out though. I promise.