Unemployment in Canada

On June 7, the Globe and Mail‘s David Parkinson painted a rosy picture of the Canadian labour market. “Canada’s unemployment rate sinks to new low as hiring gains continue,” the headline reads. He wrote that “Canada’s unemployment rate fell to a new four-decade low in May, as the economy followed up April’s record hiring spree with a month of modest job gains and rising wages.” Referring to last month’s Labour Force Survey, Mr. Parkinson argues that “the labour market continues to be a pillar of strength for the Canadian economy.”

But last month’s Labour Force Survey data do not in fact support his assessment.

Mr. Parkinson relies on the “unemployment rate” for his analysis. This narrow and dubious ratio measures people actively looking for work over the “labour force” (people looking for work and those already employed).

The unemployment rate is often criticized because it does not include those people who have given up looking for work. In the context of general economic stagnation, relying exclusively on the unemployment rate to shed light on the state of employment is unwise. If businesses do not invest and there is chronically high unemployment, many people willing and able to work may give up searching for a job.

In Mr. Parkinson’s judgement, those idle bodies should rest easy knowing they have contributed to the country’s “pillar of strength” – its low unemployment rate.  

Mr. Parkinson argues that the drop in May’s unemployment rate is a positive sign for the labour market. While it is true that the unemployment rate fell, it is not because businesses or governments are hiring. To the contrary, private and public sector employment fell by 13 and 21 thousand, respectively.

The unemployment rate fell because 49 thousand people gave up looking for work and another 62 thousand became self-employed. The largest addition of self-employed persons was in construction, which added 16 thousand. The fate of these “self-employed” workers is tied to fate of the housing bubble. The next largest addition was professionals, who contributed 15 thousand. Health care and social assistance together added 14 thousand, while educational services added 12 thousand. While some of these self-employed workers have had the dubious privilege of joining the ranks of the precariously employed, few of the gains came from “hiring” as Mr. Parkinson suggests.

It is possible to construct a counterfactual unemployment rate by assuming no change in the labour force from one month to the next (i.e. by assuming that all workers who were looking for work one month continued to look for work the next). If we assume that the people who were looking for work in April did not give up in May, then the unemployment rate merely fell to 5.6% in May from 5.7% in April. And the 0.1% increase came from self-employment, not business or government hiring.

Let us now set aside the unemployment rate. It does not capture the state of Canada’s labour market very well.

The employment rate measures the number of employed workers as a share of the working-age population, including public, private, and self-employed workers. It is a broader and, for our purposes, more reliable measure of the state of Canadian capitalism. The employment rate continued to stagnate at 62.15% in May, up from 62.13% in April. This is well below its pre-crisis high of 63.5% over a decade ago. While these percentages seem small, they represent large magnitudes. For example, between September 2008 and September 2009, the employment rate fell from 63.4% to 61.2%, but this represented 361 thousand job losses.

If we focus on the business sector, we get a more nuanced picture. The business employment rate is a narrower measure that excludes self- and public-sector employment. It is a useful gauge of employment trends in the private sector. While Statistics Canada does not make the business employment rate readily available, it is possible calculate it from existing data.

Figure 1 shows the annual average business employment rate from 2007 to 2019. It registers a small increase in the annual average from 39.6% in 2018 to 40.1% in 2019. While it reached its highest post-crisis level of 40.3% in April, it is still well below its pre-crisis high of 41.4% in January 2007. And a close look at the monthly data reveal that the business employment rate fell from 40.3% in April to 40.1% in May. Thus, these data too reveal the unreliability of the unemployment rate and the Globe and Mail’s misleading headline. The bigger story is a decade of stagnation and the country’s persistently low employment rate.