With unemployment at record lows and inflation soaring, the threat of strong wage growth is looming. However, economists at CIBC World Markets Inc. say there’s still room for job gains that don’t spark surging wages.

In a new report, CIBC’s economists said that with the jobless rate back below its pre-pandemic level, many investors “assume that the Canadian labour market has moved past it’s non-inflationary potential.”

The report argued there’s capacity for further job growth without sending wages up.

Want more immediate, memorable insights? Listen to this Soundbites episode, featuring Darren McKiernan of Mackenzie Investments.

“While we’ve dined out on huge job gains, we believe that there is still room for dessert, with further hiring and reductions in the unemployment rate attainable before sustained, labour-market driven inflationary pressures emerge,” it said.

The report pointed to structural changes in the labour market, including a lower share of younger workers (which tend to have higher jobless rates), a lower share for seasonal employment (in sectors such as agriculture, fishing and logging), and increasingly efficient job matching thanks to the internet. This means there’s likely less short-term “frictional” unemployment in today’s labour market compared with the past.

The report said these changes suggest that the overall non-inflationary unemployment rate is likely lower today than it has been in previous climates.

Additionally, while employment has returned to pre-pandemic levels, the economy wasn’t at full employment in early 2020. In fact, Quebec was the only province showing signs of wage inflation before the pandemic, it said.

“Overall, the evidence suggests that an unemployment rate of 5% or just below could be achieved without seeing sustained strong wage growth,” the report said.

So, while wages can be expected to rise in the months ahead, the report said that this “is more likely to be the result of past inflationary pressures than a cause of future ones at this stage.”

Moreover, the ability of the labour market to strengthen without sparking wage inflation means that interest rates may not have to rise as far, or as fast, as some fear.

This “supports our call for interest rates to rise towards neutral (around 2-2.5%) in 2023, but will not necessarily need to exceed that level as financial markets are currently expecting,” the report said.