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Monthly Economic Letter

June 2018
Feature article

How the gig economy can help meet your labour needs

Get work done with less headaches and lower costs

Increasingly, Canadian entrepreneurs are saying their No. 1 problem is finding labour for their growing businesses. One answer might be to tap into the gig economy.

The gig economy refers to people having temporary jobs, or doing separate pieces of work, rather than working as an employee.

You might think of Uber drivers or AirBnB hosts, but the gig economy is much broader in scope. There are two distinct types of workers: semi-skilled and highly skilled. Lawyers and architects to drivers and repair technicians are all participating in what you can think of as the on-demand service economy.

While difficult to measure, between 30% to 40% of the U.S. workforce engaged in “gig-work” in 2017, according to the Federal Reserve and the U.S. Government Accountability Office. In Canada, Randstad, the largest staffing company in Canada, estimates the gig economy at 30% of the workforce (using a broad definition including independent contractors, consultants, and freelance workers). Intuit Canada, a software firm, suggests that by the end of the decade, gig workers could represent 45% of the workforce in Canada.

Three factors fueling the gig economy

The rise of the gig economy appears to be the result of three phenomena.

  • Technological change—Digital platforms are allowing for the direct matching of employers and workers through online marketplaces, reducing the need for temporary help agencies. As well, platforms provide ratings–sometimes for both buyer and seller–increasing transparency to make informed decisions.
  • A skilled yet aging labour force—Some older workers need work because they lack sufficient savings for retirement, while others simply enjoy working and take on contracts more or less often.
  • A muted recovery from the Great Recession—Many workers have turned to the gig economy to supplement their income. That’s not surprising when you consider that wage growth has been very slow since 2010, averaging just 2% annually in both Canada and the U.S. Part-time and temporary contracts have risen as well, especially in the U.S. where many workers need to work more.

Why your small business might use gig workers

Through different platforms, businesses can access skilled workers from all over the world to perform specific tasks or projects "on demand." This can help your business reduce costs and scale up.

Costs savings & flexibility

As a company, you can increase your flexibility and potentially lower your cost base by hiring people with specific skill-sets for individual projects. Hiring people on a contract basis means benefits such as worker’s compensation, payroll taxes, vacation, sick leave, and pension benefits are not paid. As well, the fees paid to a freelancer are a business expense, reducing your corporate income taxes. However to ensure the right level of quality, you may pay more on an hourly basis to a contractor than a full-time person. Cost savings arise from the flexibility you derive by hiring people only for what you need them to do.

If the gig worker works remotely, your business also saves on office space and equipment. Pay rates will reflect the costs of living in different locations, and so your business may be able to afford talent at a cheaper rate than you would pay in Canada.

Before you begin searching, it’s important to clearly define your project and the skills you need. A targeted search will save your business time and money.

A caveat: You need to ensure you’re not hiring someone as a contractor when the job is truly a full-time position. As an employer, it’s your responsibility to determine whether a person working for you is an employee or a self-employed contractor. In the U.S., the Internal Revenue Service is performing more audits to prevent employment category misclassification. This may happen in Canada as well.

A person’s employment status affects not only their income tax status, but also their contributions for Employment Insurance and the Canadian or Quebec pension plan, as well as their eligibility for employment benefits. To learn more, read this article on determining the difference between an employee and an independent contractor.

As the gig economy expands, government regulation may change the status of gig workers. For example, several employment tribunals in the United Kingdom have ruled that gig economy workers are not self-employed and thus should enjoy paid holidays, the minimum wage and other rights.

Improve quality, increase productivity and grow your business

You can hire someone with great skills and experience that would normally require a six-figure salary if engaged on a full-time basis. They may be multi-faceted experts or have worked in a variety of industries. The right person could also provide strategic advice for your firm.

Most gig workers prefer to set their own schedule and want the flexibility to choose when they work. This is great for project specific work with tight timelines. The person should know upon contract signing the delivery timeframe you expect.

You can use gig workers to work on specific projects such as an expansion, new product launch or technology upgrade, freeing your full-time staff to focus on day-to-day operations and longer-term projects.

Hiring gig workers means that costs spent on training and developing your full-time staff can be more effectively used because your business will not be training temporary workers—they should come with the skills you need.

It’s possible that hiring someone for a temporary project could turn out so well that you decide you want to keep them on a permanent basis. So, you got to do a test drive first.

What does this mean for entrepreneurs?

  1. As labour shortages increasingly become a constraint to growing your business, consider using gig workers to help manage workflow, tackle specific projects or get expert advice.
  2. Check out this article for tips on how to find the right workers for your needs. Here are some digital platforms where you can connect with resources.
    • UpWork (web and mobile development, writing, accounting, financial modelling, among other things)
    • UpCounsel (legal services),
    • Codeable (website development)
    • Fancy Hands (virtual assistant)
    • Fiverr (marketing, graphic design, personal assistant, voiceovers, translation, among other things)
    • FreeLancer (close to 1,000 different job categories ranging from data entry to logo design to home design)
  3. Recruitment and retention will become increasingly important to your business. Check out what other entrepreneurs are doing to manage in today’s challenging labour market in BDC's report Future-proof your business: Adapting to technology and demographic trends.
Canadian economy at a glance

Canada’s economy grows modestly in first quarter, with strong business investment leading the way

Despite uncertainty over protectionist trade actions from the U.S., Canadian entrepreneurs focused on strong global demand and invested to grow their businesses last quarter. This investment bodes well for coming quarters.

Canada’s gross domestic product grew by a modest 1.3% on an annualized basis in the quarter. Although households continued to buy services, they shunned durable goods, such as autos, with overall household consumption slowing to just 1.1%, about a third of the average pace over the past two decades.

Growth led by strong business investment

The impressive growth came in business investment, up 11.7% on an annualized basis. By contrast residential investment fell 7.2%, reflecting a slowdown in the housing market.

Business investment was strong last quarter across all segments—constructions, machinery and equipment, and intellectual property. Many companies have been operating close to capacity and this investment will allow them to ramp up production to meet demand. It is also an indication that businesses are forging ahead with growth plans despite the tough trade talk south of the border.

The housing market is cooling down

Weakness in the housing sector is not a surprise given higher interest rates, new mortgage rules and taxes on foreign buyers in British Columbia and Ontario, as discussed in our main article in May. Whether a larger contraction in the housing sector is underway is not yet clear. While housing starts hit a peak in November last year and have trended lower since then, the average for the first five months of 2018 is still higher than the same period last year.

Based on current data, we don’t expect the slowdown in the residential sector to lead to a more significant downturn for the economy. While the construction sector shed 31,000 jobs in the past two months, employment remains above where it was in May 2017. Overall, the unemployment rate has been steady at 5.8% nationally for the past 4 months.

Wages are picking up, averaging over 3% in the services sector and just under 2% in the goods sector over the past six months, compared to a year ago. This should support continued consumption by households in the months ahead.

Tariffs could become a headwind to growth, but have little impact so far

While net trade was a drag on growth last quarter, the picture brightened in April with exports picking up and imports falling. Exports of energy, metal and non-metallic mineral products, and consumer goods led the way during the month.

U.S. import tariffs of 25% on steel and 10% on aluminum, which came into force on June 1, will likely hinder Canada’s exports of these items because the tariffs increase the price paid by U.S. importers. The key question is whether demand for steel and aluminum, and the products they are used to make, is sufficiently strong that U.S. importers will continue buying Canadian products despite having to pay higher prices. The oil-and-gas industry, as well as the transportation, construction and consumer goods sectors, are all important users of these metals and all are roaring ahead at the moment.

So far, the threat of tariffs has not hindered business investment in either Canada or the U.S. If the tariffs are simply a negotiating tactic by President Donald Trump, then they will have no real impact on the economy. If, however, they stay in place, and further retaliatory measures are enacted, then we would expect to see slower growth.

A pick-up in investment should help to keep inflation in check

Inflation dipped in April compared to March but remains within the Bank of Canada’s target range. Most forecasters expect the Bank of Canada to raise its key policy rate this summer by a quarter of a percentage point. However, the bank might wait a little longer if it is concerned about the slowdown in the residential sector or putting a damper on the much-needed surge in business investment.

What does it mean for entrepreneurs?

  1. While the economy maintains a comfortable rhythm, business investment in capacity should keep inflation in check.
  2. If you are hitting capacity constraints and haven’t yet invested, you will want to spend sooner rather than later, given rising interest rates.
  3. If your capacity constraints are due to a labour shortage, check out the main article this month on the gig economy for some ideas.
U.S. economy at a glance

U.S. growth improves as investment picks up

Impact of trade turbulence will be the wild card in coming quarters

The U.S. economy grew by a healthy annualized pace of 2.2% in the first quarter, thanks to surging business investment. Investment by firms was up 9% compared to the fourth quarter with all categories—construction, equipment and intellectually property—seeing impressive gains.

Growth was also positive in other segments of the economy last quarter with only residential investment marginally lower. However, net exports were essentially flat, and the uncertainty related to import tariffs could put a damper on growth by hurting both domestic consumption and exports. Typically, household spending is the largest contributor to U.S. economic growth. The slower growth in household spending is linked to lower than expected wage growth.

Labour market continues to tighten, but wages rise modestly

Over the past year, employers have created nearly 2.4 million new jobs. This has helped to drive the unemployment rate to an 18-year low of 3.8%.

Behind the headline rate, there are other clear signs that slack in the labour market is diminishing. The number of long-term unemployed has declined by 476,000 over the last year. Discouraged workers—those who are marginally attached to the labour force—are returning to work.

Access to this pool of underutilized labour explains why wage growth has been relatively muted so far, rising by only 2.7% compared to a year ago. Businesses continue to find workers to fill jobs, although in certain industries, such as construction and transportation, it is becoming more difficult.

Interest rates on the rise, despite fears of a global trade war

Overall, the U.S. economy is showing steady growth, and the surge in investment bodes well for coming quarters. However, the great unknown is the impact of trade conflict with Canada and other major economies. President Trump’s decision to impose tariffs on steel and aluminum imports from Canada, Mexico and the European Union and these countries’ retaliatory measures will ultimately hurt economic growth. For now, the Federal Reserve is signalling more rate hikes to come, further evidence policymakers are confident in the economy’s strength.

What does it mean for entrepreneurs?

  1. Stronger U.S. investment is great for Canadian firms selling into the U.S. market.
  2. Rising U.S. interest rates should lead to a lower Canadian dollar relative to the greenback, which is helpful for Canadian exporters.
  3. Rising U.S. rates also means the wholesale borrowing costs for Canadian banks will increase, putting pressure on them to raise their rates, as well. As noted last month, if you have investment plans, it may make sense to lock in a rate sooner rather than later.
Oil market update—May 2018

Global oil prices continued to rise in May

But rumours of OPEC supply coming back may mean they’ve hit a plateau

Saudi Arabia and Russia expected to increase supply

With supply and demand in balance in the first quarter of this year, the deal struck in November 2016 between Saudi Arabia and Russia, along with 22 other oil-producing nations, to cut 1.8 million barrels a day appears to have done its job of lifting prices.

In late May, the energy ministers of Saudi Arabia and Russia said they could ease the supply cuts.

According to Goldman Sachs, an investment bank, even if Saudi Arabia, Russia and others bring back as much as 1 million barrels a day to the global market that would not be sufficient to drive prices lower. The diminished global supply of Venezuela, Mexico and now, Iran (given the resuming U.S. sanctions), means that the other countries can afford to pump more. (See May and February oil market updates for discussion on these countries.)

All the countries party to the supply cut agreement are meeting at the end of June in Vienna to discuss how much and when to resume higher production.

Canadian oil prices should get a boost

The Federal Finance Minister announced on May 29th that the Government of Canada will buy the Trans Mountain pipeline assets of Kinder Morgan for C$4.5 billion and assume responsibility for building the pipeline until it finds a private sector buyer. Export Development Canada will provide a loan guarantee through the 2018 construction season. Work on twinning the pipeline has resumed and the sale will close in August. While the final cost is not known, federal ministers indicated that oil companies will be expected to contribute on a user pay approach, according to CTV news.

ARC Energy Research Institute senior director Jackie Forrest believes that Canadian oil producers will benefit as there will now be certainty around takeaway capacity. Domestic crude oil prices should also see a boost. The discount of Western Canadian Select (WCS) to West Texas Intermediate (WTI) began to narrow in late March as pipeline capacity on the Keystone XL resumed and Canadian production slowed allowing inventories to draw down. With the construction of the Trans Mountain pipeline resuming, producers will be able to rely on a more cost-effective transportation method, which means that WCS will return to trading with its typical discount of US$15-20 to WTI, which is based on the distance to the Gulf Coast and the sulphur content in the oil.

Despite the 15 outstanding legal challenges with the Federal Court of Appeal, the Federal Government argues that by owning the assets, it is exerting its jurisdiction to get the project successfully built. Rachel Notley, the Premier of Alberta, noted that with the Federal Government’s ownership comes "Crown immunity" which will limit the degree to which provincial laws apply to the project.

Demand slowing slightly on higher prices

The International Energy Agency revised its forecast for global oil demand growth downwards last month from 1.5 mb/d to 1.35 mb/d, largely due to higher prices. When oil prices declined in 2014, many developing countries, including Indonesia, India, Malaysia, and Saudi Arabia, reduced or eliminated oil subsidies. This means that as prices rise, individuals will feel the effect more than in the past. The IEA anticipates that a 9% rise in oil prices would lead to demand falling by approximately 300 mb/d.

Bottom line

The increase in oil prices has relented on expectations of greater supply and decelerating demand growth. Lower inventories mean that prices will be more prone to react to geopolitical developments. Strong fundamentals remain supportive to benchmark prices in the range of US$55-65/barrel and to WCS stabilizing about US$15-20/barrel below WTI.

Other economic indicators

Strong hints of hike for July

Hints of a hike for July are getting stronger as the Bank adopted a more hawkish speech on May 30 after it kept the policy rate unchanged at 1.25%. The Governing Council stated that it will take a gradual approach to policy adjustments and expressed that higher interest rates will be warranted to keep inflation near its 2% target. Officials from the Bank will continue to keep a close eye on data as they become available and will react accordingly. They will notably keep track of housing activity, following the sector’s poor results in the beginning of 2018, though the Bank is confident that it will pick up in the next quarter.

The loonie remains low as protectionism rises in the U.S.

The loonie appreciated against the greenback at the end of the month amid the rising likelihood of a rate hike in July. The Canadian dollar averaged 77.7 U.S. cents over the course of the month but rose by almost 1% following the Bank’s statement on May 30th before falling back in early June. The Fed raised its own policy rate to 2% in June, a month before the next meeting of the Bank. The rising differential between the two countries’ interest rates will keep the loonie low, as well as the uncertainty surrounding our trade with the U.S. and rising protectionism south of the border.

SME confidence bounces back in May

Canadian entrepreneurs’ confidence improved by 6 points in May according to the CFIB’s Business confidence survey. The Index reached 62.5 last month, getting closer to 65—the level at which CFIB expects when the economy is growing near potential. Prince Edward Island and Quebec are the most optimistic provinces, followed by Ontario, which recorded a 7.8-point increase. On the other hand, Saskatchewan and Newfoundland and Labrador, are now below 50, which means that business owners who are expecting a weaker performance in the next year outnumber those expecting stronger performance. The natural resources sector lost over 12 points in May and has the least positive outlook in Canada. Finance, insurance and real estate remains the sector with the brightest future according to business owners surveyed. A shortage of skilled labour remains the most common limitation to production growth. Business owners expect wage growth of 2.1% this month, the slowest pace in last 12 months.

Credit conditions remain favourable

Canadian businesses continue to see favourable credit conditions. The business effective interest rate reached 3.49% in mid-May but dropped to 3.42% at the beginning of June. At the same time, the household effective rate has risen by seven basis points since April, in part driven by higher mortgage interest rates. Business and household effective rates are slowly increasing, reflecting the 0.75 percentage point rise in the policy rate since last July.

Key indicators–Canada