A tale of 2 economies: Making sense of U.S. and Canadian labour market data
Since unemployment rates by themselves do not tell the whole story, we must dig deep to get a full picture
If you’re watching labour market statistics on both sides of the U.S. and Canadian border, you might think our economies are heading in very different directions.
But a closer look shows that there are striking — and troubling — similarities.
The U.S. economy seems to be outperforming expectations, according to labour market data released last week. In February alone, the it added more than 295,000 jobs; the 12th time in a row monthly job creation was at least 200,000.
Job creation is widespread across all sectors and demographics, suggesting a firmly-rooted recovery.
Unemployment has shrunk to 5.5 per cent, which is where it stood in May 2008. Finally, as the Secretary of Labour, Thomas E. Perez, boasted last week, February marks the first time in more than three decades that unemployment fell in all 50 states.
What more could you say? Apparently, the U.S. is on course for a strong growth spurt, fuelling fear of inflation, which may convince the Federal Reserve to raise interest rates sooner than expected.
But we mustn’t believe everything the man behind the curtain is saying.
As always, statistics can be used to spin any good story. A closer look reveals a somewhat different story, and in fact, a story that is much closer to our own. In the end, both the U.S. and Canadian labour markets are much closer in character than most pundits would care to admit.
Since unemployment rates by themselves do not tell the whole story, we must dig deep to get a full picture.
First, there is still too much part-time employment, and the current employment ratio (the ratio of employed individuals to the overall labour population) is still low, at 59.3 per cent, a full three points below where it stood before the recession (the labour participation rate sits at a low of 62.8 per cent). This means many workers still can’t get full-time jobs and are leaving the labour market altogether.
As American economist Thomas Palley wrote recently, close to 22 million American workers are still looking to work more. Clear evidence, he says, that the U.S. is still far away from full employment.
In fact, Bucknell University professor Matias Vernengo, argues that if participation rates were at the same level today than at the end of the Clinton boom years (67 per cent), unemployment today in the U.S. would be close to 12 per cent and not 5.5 per cent. Now that’s a different story indeed.
And then there is wage growth, which remains relatively weak.
Wage increases have averaged 0.01 per cent, well below January’s 0.5 per cent gain, so wage gains may in fact be slowing down. More importantly, February’s paltry wage gain is still way below productivity gains, which means there is no threat of inflation on the horizon.
This brings us to economic policy.
It is now widely expected that the U.S. Federal Reserve will begin raising interest rates, and possibly as soon as June, if not earlier. But would this increase be justified?
Given the relatively weak labour market still, and the lack of any inflationary pressure, a rate hike now would seem to be premature.
All this brings us back to Canada.
Recall that in January, while labour markets created more than 35,000 jobs (although I expect those numbers to be revised downward), these were all part-time employment and self-employment, thereby emphasizing the precarious nature of the Canadian labour market. This followed a December where the economy actually shed jobs.
The latest job numbers for February are far from encouraging.
The Canadian economy again shed jobs, albeit fewer (1,000), but the unemployment rate increased back up to 6.8 per cent from 6.6 per cent. As I said before, we are heading in the wrong direction.
And there is more.
If the labour force participation in Canada were at the same level as at the beginning of the crisis, then Canada’s real unemployment rate would be closer to 9 per cent today.
This is as far away from full employment as we can get.
It is becoming overwhelmingly clear that both economies are suffering considerably, and are still far from a sustained recovery, although Canada’s economy is doing far worse.
The Federal Reserve should not be raising rates. In both countries, what we need is fiscal stimulus and massive investment in public infrastructure. Unfortunately, ideological and political nearsightedness will prevent that from happening, virtually guaranteeing a prolonged period of misery.
Louis-Philippe Rochon is an associate professor at Laurentian University and co-editor of the Review of Keynesian Economics.