The Bank of Canada has enough weight on its shoulders and does not need another challenge. The red-hot Alberta economy has been spewing wage and inflation pressure, suggesting the need for higher interest rates to cool demand nationally, even if there would be no immediate impact on the Wild Rose Country. Higher interest rates is the last thing we need, say Canadian manufacturers, as they growl under the burden of the sky-high dollar and energy prices.

While the tight labour market in Alberta and manufacturers' travails get all the attention, a marked drop in the unemployment rate in British Columbia since 2002–03 has slipped below many analysts' radar screens. In the current cycle, national and provincial jobless rates peaked in 2002–03 and subsequently declined to below their long-term averages. For eight provinces, the decline up to this year has been close to the national average of 1.0–1.5 percentage points. In Alberta, the decline has been 2.0 percentage points. In a less-documented case of British Columbia, the decline has been a whopping 4.0 percentage points.

The sheer magnitude of the decline in the province that accounts for slightly more that 13% of the national labour market has significant implications for national wage and price inflation, and thus the Bank of Canada and financial markets. Luckily, wage and price inflation is conspicuously absent in British Columbia. For example, while average hourly earnings of permanent workers rose 7.3% year-on-year (y/y) during January–May in Alberta and 3.3% in Canada, the increase has been just 1.8% west of the Rockies. Similarly, over the same period, consumer prices rose 3.7% y/y in Alberta, 2.5% in Canada, and only 1.8% in British Columbia.

A skeptic would say it is only a matter of time before wage and price pressure similar to that in Alberta will emerge in British Columbia. If that were to happen, based on the data in early 2006, national wage and price inflation would rise 0.7 and 0.3 percentage point, respectively. Global Insight has dug deeply into unemployment and wage data to see if perhaps special factors account for the lack of wage pressure in British Columbia. We have tried to control for discouraged workers, the changes in the composition of employment by industry, and for the unionization of the labour force. We have found that wage pressure is lower in British Columbia than in Alberta, and even Canada, across a wide range of measures, including unionized and non-unionized workers.

The wage and price data seem to suggest that British Columbia's labour market currently experiences much softer resource constraints than Alberta's and even Canada's. If this is true, then the 4-percentage-point decline in British Columbia's unemployment rate since 2002–03 has been partly cyclical and partly structural—i.e., long lasting—in nature.

When the Canadian economy was at or slightly above its potential in 2000, the national and B.C. jobless rates averaged 6.8% and 7.2%, respectively, which was fairly close to sustainable levels. Unemployment rates rose subsequently as the economy weakened in 2001, reaching peaks in 2002–03. The national jobless rate peaked at 7.6% in 2002 and 2003, while the B.C. rate topped out at 8.5% in 2002. The subsequent decline of the Canadian rate to 6.8% and the B.C. rate to 7.2% was an expected result of the economy returning to its sustainable potential.

The million-dollar question is how much of the further drop in the national unemployment rate to just above 6.0% and the B.C. rate to 4.5–5.0% is structural in nature? There have been no changes in the federal labour market policy since 2000 to significantly lower the structural unemployment rate. Consequently, if there was any marked loosening of the labour market rigidities, it must have come from the provinces.

It is probably more than just a coincidence that B.C. Liberal party came to power in 2001 on a pro-business platform. The 2004 budget document contained a topic box "Bringing Out the Best in British Columbia's Economy," which summarized achievements to date and planned the road ahead for the Liberal government to make the provincial economy more competitive. While no single measure stands out as directed towards lowering the structural unemployment rate, the cumulative impact of the fiscal re-engineering may have been just that. On the assumption that the structural unemployment rate in British Columbia has declined from just over 7.0% to 4.5–5.0%, the national structural unemployment rate would now be 0.3 percentage point lower than in 2000, or about 6.5%. This is in fact where Global Insight sees the jobless rate stabilizing over the medium term.

Should the Bank of Canada and financial markets worry about the B.C. labour market? No. There is strong evidence to suggest that there has been a sufficiently significant easing of labour market rigidities west of the Rockies to lower the structural unemployment rate for Canada as a whole. The major test of our theory will come later this year, after the provincial government negotiates pay increases for almost 90% of public service workers following several years of wage restraint.