What explains this gap?
There is a pivotal debate ongoing at the Federal Reserve regarding labor force participation. It plunged at the height of covid to 61.0% from 63.3% and has only recovered to 61.6%.
One argument that appears to be gaining steam is that because of an aging population and covid risks, people retired sooner. Quarles has made this point and Mester appeared open to it.
It's a critical argument because the economy really isn't at full employment until the people who are loosely attached to jobs are pulled back in. If that's a real gap, it means that true unemployment is nearly two percentage points higher than it appears.
Here is a chart the Fed needs to see, it shows Canadian labor force participation overlayed against the US and now shows nearly a total recovery.
One important thing to note is that Canada's retirement age population is even larger than the US. So on demographics alone, you would expect Canadians to be the ones pushed to retire early. You could argue that the US is a richer country so more Americans might have the opportunity to retire but I'd counter that Canadian baby boomers who would be inclined to retire have received a tremendous windfall from housing.
What explains the gap?
The US is clearly ahead of Canada in the reopening and jobs appear to be plentiful in the US, so how can this gap be explained?
I believe it comes down to the structure of pandemic assistance programs. In the US, the government paid people generous unemployment benefits. That created an incentive for people to stay home and cautiously return to the labor force. I also suspect there is a high amount of double dipping where people collecting benefits are working cash jobs.
In Canada, the government heavily subsidized employment, paying up to 75% of workers' salaries. As a result, people stayed on company payrolls. That encouraged remote work and made it much easier for people to get back on the job. That maintained the labor force attachment that's often so critical.
In those two charts, you can see how different policy choices played out.
What happens next?
The key date in the US is September 6, that's when supplementary unemployment benefits run out nation-wide and payments fall to very low levels. That should prompt a stampede back into the labor force and reveal some slack that will take the pressure of wage inflation.
In Canada, those pressures shouldn't be as acute. Of course, most of Canada already has minimum wages in the $13-15 range so that also skews the dynamic.
The issue for the US is that the benefits and job-shopping that's ongoing may have changed the dynamic. Workers don't appear to be in any rush to settle for low-wage jobs and the new negotiation power (or drive) would be inflationary, at least to a point.
Overall, I think that gap ultimately closes and that keeps the Fed on the sidelines longer while the negotiation power leads to some modest wage pressure that quickly fades, perhaps after settling at a higher level.