Labour shortages hinder SME growth: report

November — Canadian small and medium-sized enterprises (SMEs) often report that they face hiring challenges that limit their growth prospects and affect their access to capital, says a new report by the C.D. Howe Institute.

This is despite the vital role that SMEs play in job creation and economic growth. Between 2014 and 2018, SMEs contributed an average of 53 percent to Canada’s gross domestic product (GDP) and employed more than 14.3 million workers in 2022.

In Empty Seats: Why Labour Shortages Plague Small and Medium-Sized Businesses and What to Do About It, authors Parisa Mahboubi and Tingting Zhang analyze the severity and causes of labour shortages in Canada in a post-COVID-19 climate. They underscore the necessity of addressing wage discrepancies and offer recommendations to mitigate labour shortages through complementary strategies such as optimized utilization of immigration, better human resource practices, and more investment in automation, highlighting the roles that both employers and governments can play.

“Labour shortages occur when there is an insufficient supply of workers to meet the demand for jobs in a particular industry,” said Mahboubi and Zhang. “Not all shortages are driven by the same factors. For example, wage-level disparities, demographic shifts, skill mismatches, changes in work preferences and barriers to labour mobility can all contribute to shortages, as well as gaps in education and training, geographic disparities, demanding work conditions and labour market inefficiencies.”

Even though the majority of small businesses reported to have increased wages in response to shortages, some said they still received no qualified or no applicants. The paper finds that the magnitude of wage increases and the wage level make a difference in recruiting workers, and the disparity between the job seekers’ reservation wages and the wages offered can be a reason for lack of applicants.

Beyond the imperative to address wage mismatches, Mahboubi and Zhang encourage a multi-faceted approach, which includes workforce development, education and training initiatives, immigrant integration, improved human resources practices, and adapting to new technologies.

“Mitigating labour shortages in SMEs not only improves their competitiveness, but also helps create jobs and fosters economic growth,” the authors conclude. “Employers and governments need to collaborate to identify the gaps in skills and labour shortages and address them through a focus on barriers to employment and skill development. Narrowing the gap between available labour and workers’ skills will ensure a more productive future that includes faster growing businesses and increased job creation.”