Overview of Labour Market Trends.
Part One: Labour Market Slack and Economic Stagnation
By Travis Fast
There is a growing confidence that the Canadian economy has in fact de-linked from the US economy. The faith that somehow the Canadian economy can avoid falling into a recession despite a recession in the US is to my mind fanciful thinking. In the wake of NAFTA a monumental rationalisation of the North American economy was undertaken which served to further integrate the three economies not insulate them from one another. As they say: only time will tell all; so for the moment let me leave the argument about de-coupling to the side.
Some analysts of the Canadian scene have posted graphs like this one:
This graph from Stephen Gordon purports to provide evidence that Canada has delinked and that the Sun will keep on shining. But the de-linking story critically hinges on the capacity of the Canadian economy to keep expanding. So let us assume that the likely path of US demand is inconsequential to Canadian prospects; and instead inquire about any endogenous barriers to growth that may serve to check Canadian economic expansion over the near term.
Asking the question from this angle turns what initially looked like an optimistic empiric (Gordon’s graph above) into a picture of pessimism. Canadian labour slack is now at an all time low measured by any metric you care to name. As Gordon’s graph clearly shows, employment rates are at an all time high (his graph goes back to just to 2000 but the numbers I have plotted go back to 1976). The problem with the employment rate is that it is deceptive insofar as it is of the most extreme unlikelihood that the employment rate would ever = 1. That is, such a metric is a bad indicator of labour slack because a reading 0.64 gives the impression that there is an abundance of labour supply yet to be had.
To capture labour slack we can only use the historical record to estimate where the likely ceiling to labour supply rests, and hence the degree of labour slack. Take a look at this graph plotting three measures of labour slack.
Click for larger image
The first being the most often cited and familiar: the unemployment rate. The next two (Slack A and Slack B) are interesting because they attempt to control for labour force participation rates—among other things– which can play havoc with unemployment numbers (that is why economists prefer the employment rate metric because it is calculated without reference to the size of the labour force as determined by the Labour Force Survey, but, rather, to the absolute potential pool of workers, that is, the Canadian population 15 years of age and over).
My two additional measures attempt to capture something slightly different. First Slack A is a simple plot of the participation rate minus the employment rate. We can think of this metric as another measure of unemployment. Slack B measures the differences between the unemployment rate and Slack A. Each of these metrics is interesting because they all have an absolute floor of zero. But the last metric is interesting because it tells us something about the relationship between employment rates, participation rates, and the historical degree of slack in the labour market. And by this metric we are at an all time low of 1.9%.
The last two metrics tells us that labour supply has become a potential barrier to future growth. The conditions for the long boom both in the US and Canada were partially set by the massive labour reserves and subsequent traumatisation (Greenspan’s phrase) of workers expectations that built up from the early eighties until the early 90s. Those reserves have now been worked-off. As to the post-traumatic stress of worker’s who knows.
And all of this brings us to policy. What little room is left for an expansion of labour supply can only, at this point , be addressed by policies that would have had to have been adopted some time ago. Namely, a robust active labour market policy focussed on (re)training and geographic mobility. What unemployment that exists in Alberta, for example, is purely of the supply side kind, i.e., a skills mismatch and workers seeking better employment. And this is much the same story across the West. As for the East, it is true there is more labour slack than in the West, but there has already been a massive migration West. With labour markets this tight, and with much of the unemployment explained by a skills mismatch and geographic disequilibrium it is simply not likely that market forces will be sufficient to bring the quality of supply into existence nor deliver it where it is needed.
In Sum, operating at these low levels of labour slack requires robust active labour market programs alongside a robust skills planning and forecasting regime. None of which exist at either the federal or provincial levels. And all of this brings us back to the idiocy of general, non-targeted tax cuts. They do not serve to direct economic activity either towards depressed sectors and spaces or dampen activity in over-heated sectors and spaces. Coarse tuning, such as general tax and interest rate cuts, is likely going to make things worse and may actually induce a higher rate of inflation then needs be the case.
Now of course the kind of subtle fiscal and monetary policy this brief analysis suggests cannot be readily developed let alone deployed. And this is why I think it is wishful to think that the Canadian economy can continue to expand. Crucially because all that can be done in the short term is boost the number of hours individual workers are working and this too has limits, for not even an economist can assume there is more than 24 hours in a day.