The labour market hit a speed bump in July with the unemployment rate rising and the economy unexpectedly shedding jobs, suggesting the Bank of Canada’s interest rate hikes are working to bring an overheated economy back into balance, though wage growth could present some risks.

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Employment was little changed in July with a drop of 6,000 positions, Statistics Canada reported Aug. 4. The unemployment rate edged up 0.1 percentage points to 5.5 per cent, the first time the jobless rate has increased for three straight months since the beginning of the pandemic, and is now up 0.6 percentage points from its multi-decade low a year ago.

Economists had expected employers to add 25,000 jobs last month, while forecasting the unemployment rate to match the headline print.

Average hourly wages climbed higher from a year earlier, rising to $33.24, an increase of five per cent after rising 4.2 per cent in June and 5.1 per cent in May. Wages are outpacing the rate of inflation, which was 2.8 per cent in June and 3.4 per cent in May, something Bank of Canada policymakers will be watching closely. Steady gains in incomes are likely to make it difficult to bring inflation down to the central bank’s two-per-cent target.

Alberta Central chief economist Charles St-Arnaud said in a client note that the Bank of Canada will welcome a slowdown in job creation, but wage growth may be cause for concern.

“The higher unemployment rate, while still historically low, suggests some slack in the labour market is slowly being created,” said St-Arnaud, who was a former economist at the central bank. “However, wage growth remains disconnected from weak labour productivity.”

A sharp rise in wage growth in July is estimated to have pushed the three-month annualized wage rate up to 6.1 per cent, suggesting “further acceleration” in wage growth. “Whether the pattern continues in August will matter,” St-Arnaud said.

In June, the economy gained a surprise 60,000 jobs and shed 17,000 positions in May. Total hours worked were virtually unchanged in July but up 2.1 per cent on a year-over-year basis.

Bank of Canada governor Tiff Macklem and his deputies have raised interest rates at almost every policy meeting, bringing the key policy rate to 5.25 per cent from 0.5 per cent in just under a year and a half. Policymakers resumed rate hikes in June after economic data, including gross domestic product and inflation, proved stronger than expected. More recent figures show the economy is slowing.

Construction, public administration, transport and warehousing and the information, culture and recreation industries all experienced employment declines last month, while jobs in health care and social assistance; educational services; finance, insurance, real estate and leasing; and agriculture all grew.

Strong population growth is one of the main reasons for the rise in the unemployment rate. Ottawa has set aggressive immigration targets aimed at bringing in newcomers by the hundreds of thousands each year to boost the labour market. Last quarter, population gains broke a record.

Statistics Canada said the immigrant employment rate fell last month to 77.7 per cent from 80 per cent last July, but newcomers between the ages of 25 and 54 still have higher employment rates than before the pandemic, when it hovered around 70 per cent from 2017 to 2019.

In July, hours worked edged up 0.1 per cent and the employment rate held steady as population growth outpaced it. From January to July, the employment rate fell half a percentage point as the population grew by 1.4 per cent.

Bank of Montreal chief economist Doug Porter said the consistent rise in the unemployment rate could be worrisome for those betting on a soft landing.

“The steady back-up in Canada’s unemployment rate is concerning, but a further rise next month should really set off some alarm bells,” he said in a client note.

This is the last set of employment data that policymakers will see before the central bank issues its next interest rate decision on Sept. 6. Economists are generally leaning towards the Bank of Canada holding interest rates steady for the rest of the year, with a possible chance of one last hike in September, depending on inflation and economic growth data.

• Email: bbharti@postmedia.com | Twitter: biancabharti