15.1 Employment and Unemployment

Question 1

What two characteristics of the labor force are common to most developed countries?

Answer 1

These two characteristics of the labour force—long-term growth in employment but short-term fluctuations in the unemployment rate—are common to most developed countries.

Question 2

What is a historical comparison between the unemployment rate and the NAIRU?

Answer 2

The unemployment rate displays considerable short-run fluctuations; the NAIRU shows a slight downward long-run trend.

Question 3

How can we compare labor force and unemployment over the long term and short term?

Answer 3

Over the span of many years, increases in the labour force are more or less matched by increases in employment.

Over the short term, however, the unemployment rate fluctuates considerably because changes in the labour force are not matched by changes in employment.

Question 4

How much has employment changed since 1976

Answer 4

The amount of employment in Canada has increased dramatically over the past few decades. In 1976, there were approximately 9.7 million employed Canadians.

By January of 2020 (just before the onset of the COVID-19 pandemic), total employment was 19.2 million.

Question 5

What is the actual amount of employment determined by?

Answer 5

The actual amount of employment, of course, is determined both by the demand for labour and by the supply of labour.

Question 6

What has been the trend on the supply side of the labor force since the end of the Second World War?

Answer 6

On the supply side, the labour force has grown virtually every year since the end of the Second World War.

Question 7

What are the three main causes of the increase in Canada’s labour force?

Answer 7

• A rising population, which boosts entry into the labour force of people born 15 to 25 years previously.
• Increased labour force participation by various groups, especially women; and net immigration of working-age persons.

Question 8

What is the net increase in employment?

Answer 8

The net increase in employment is the difference between all the jobs that are created and all those that are lost.

Question 9

Do most years see a net increase or decrease in employment?

Answer 9

In most years, enough new jobs are created both to offset the number of jobs that have been eliminated and also to provide jobs for the growing labour force. The result is a net increase in employment in most years.

Question 10

What was employment in Canada in early 2020? What is the typical yearly increase in employment?

Answer 10

In early 2020, Canadian employment was 19.2 million workers.

In a typical year employment increases by about 1 percent, meaning an absolute increase of roughly 16 000 workers every month.

Question 11

What happened to employment levels in 1980. What was it a result of?

Answer 11

Partly as a result of policy decisions to reduce inflation in several developed countries, worldwide unemployment rose to high levels in the early 1980s.

The unemployment rate remained high in many advanced industrial countries and only began to fall, and even then very slowly, during the latter half of the decade.

Question 12

What were unemployment rates in Canada between 1983 and 1988?

Answer 12

From a high of more than 12 percent in 1983, the Canadian unemployment rate fell to 7.5 percent in 1988, a point that many economists at the time thought was close to the Canadian NAIRU

Question 13

Describe unemployment rates in Canada between 1990 and 2000

Answer 13

With the onset of another recession in the early 1990s, the unemployment rate then rose through 1990 and 1991, reaching 11.3 percent by 1992.

During the next few years, the unemployment rate fell only slowly as the Canadian recovery was weak; by early 1994 the unemployment rate was still more than 10 percent. But the speed of the Canadian recovery quickened and unemployment began to drop.

By early 2000, after five years of steady economic recovery, the unemployment rate was 6.8 percent.

Question 14

How was Canada’s unemployment rates effected by the 2008 crisis?

Answer 14

With the onset of the 2008 global financial crisis and the worldwide recession that immediately followed, unemployment again increased sharply.

The Canadian economy fared much better than others, however, and unemployment increased only to 8.7 percent at the depth of the recession in mid-2009 (whereas it was considerably higher in the United States and most of Europe).

After a decade of gradual economic recovery that brought Canadian real GDP close to its potential level by mid 2019, the unemployment rate was 5.8 percent.

Question 15

Describe Canada’s unemployment rates during the Covid-19 pandemic.

Answer 15

The onset of the COVID-19 pandemic in March of 2020 led to a plunge in real GDP and a sharp increase in unemployment as Canadian governments required the shutdown of many parts of the economy.

The unemployment rate increased almost immediately—from 5.8 percent just before the pandemic to 13.7 percent in the pandemic’s first few months—as millions of Canadians stayed at home and many were unable to work.

Throughout 2020 and well into 2021, the unemployment rate declined as several parts of the economy re-opened. By the end of 2021 the unemployment rate was only slightly above the pre-pandemic level from late 2019.

Question 16

How do periods of economic growth and periods of recession or slow growth effect unemployment rates?

Answer 16

During periods of rapid economic growth, the unemployment rate usually falls. During recessions or periods of slow growth, the unemployment rate usually rises.

Question 17

In term’s of unemployment, what does the public and media tend to focus on? What can this focus often lead to?

Answer 17

The public’s and the media’s focus on the labour market, however, tends to be on the overall level of employment and unemployment rather than on the amount of job creation and job destruction.

This focus can often lead to the conclusion that few changes are occurring in the labour market when in fact the truth is quite the opposite.

Question 18

What is the amount of activity in the labour markey better reflected by?

Answer 18

The amount of activity in the labour market is better reflected by the flows into and out of unemployment than by the overall unemployment rate.

Question 19

What can we see by looking at gross flows in the labour market as opposed to net?

Answer 19

By looking at the gross flows in the labour market, we are able to see economic activity that is hidden when we look just at changes in the overall amount of employment and unemployment (which is determined by net flows).

Indeed, the gross flows are typically so large that they dwarf the net flows.

Question 20

What is “The Stock of Unemployment”?

Answer 20

In most reports about changes in unemployment, both in Canada and abroad, emphasis is typically on the stock of unemployment—that is, on the number of people who are unemployed at a particular point in time.

Question 21

What do the blue circles represent in a chart of Labor Market Flows?

Answer 21

The blue circles represent the number of individuals at the end of each month (the stocks) in each possible “state”—employment (E), unemployment (U), and not in the labour force (N).

Question 22

What does the flow into unemployment represent?

Answer 22

This flow into unemployment represents

workers losing jobs through layoffs or plant closure

workers quitting jobs to search for different jobs

new entrants to the labour force searching for jobs

Question 23

What do flows INTO unemployment represent?

Answer 23

The green line shows the monthly flow out of unemployment, corresponding to the sum of the flows in arrows ② and ④ in the first figure. This outflow represents

unemployed individuals finding new jobs

unemployed individuals becoming discouraged and leaving the labour force

Question 24

What is the connection between the flows and the stocks in the labour market?

Answer 24

Whenever the flows into unemployment exceed the flows out of unemployment, the stock of unemployment rises.

Conversely, whenever the flows out of unemployment exceed the flows into unemployment, the stock of unemployment falls.

Question 25

For two reasons data on flows can be very useful when studying the labour market.

Answer 25

First, they show the tremendous amount of activity in the labour market even though the stock of unemployment may not be changing significantly.

The second reason flows data are useful is that the relationship between the flows and the stock can tell us about the amount of time the average unemployed person spends unemployed.

Question 26

What is a good way of estimating the average duration of unemployment?

Answer 26

Stock/monthly outflow

Question 27

How does the official unemployment data produced and reported by Statistics Canada understate the full effects of recessions on workers.

Answer 27

The unemployment data refer to those individuals who are not currently working and who are actively searching for a job. As a recession continues, many workers who have been unable to find a job become discouraged and give up the search. Statistically, these discouraged workers are no longer included in the labour force.

A second problem with the official measure of unemployment is that it fails to take account of situations where an individual is underemployed.

Question 28

What is underemployment?

Answer 28

Many workers who have lost their job and are still searching for a suitable replacement may temporarily take a part-time job or a low-paying job that does not require their qualifications.

These workers prefer a part-time or low-paying job to the alternative of being totally unemployed, and they are appropriately represented in the data as being employed.

Question 29

Why is not all unemployment bad?

Answer 29

Some unemployment is socially desirable as it reflects the necessary time spent searching to make appropriate matches between firms who are seeking new employees and workers who are seeking new jobs.

Question 30

What are two costs of unemployment?

Answer 30

The first is the associated loss in output and income.

The second is the harm done to the individuals who are unemployed.

Question 31

Describe the lost output associated with unemployment

Answer 31

Unemployed individuals are valuable resources who are currently not producing output. The output that is not produced, but potentially could be, is a loss of income for society.

The loss of output and income that accompanies unemployment is lost forever.

Question 32

Describe the personal costs associated with unemployment.

Answer 32

The effects of long-term unemployment, in terms of the disillusioned who have given up trying to make it within the system and who contribute to social unrest, is a serious social problem.

The loss of self-esteem and the dislocation of families that often result from situations of prolonged unemployment are genuine personal and family tragedies.

Question 33

The general case for concern about high unemployment has been eloquently put by Princeton economist Alan Blinder…

Answer 33

A high-pressure economy provides opportunities, facilitates structural change, encourages inventiveness and innovation, and opens doors for society’s underdogs . . . All these promote the social cohesion and economic progress that make democratic mixed capitalism such a wonderful system when it works well.

A low-pressure economy slams the doors shut, breeds a bunker mentality that resists change, stifles productivity growth, and fosters both inequality and mean-spirited public policy. All this makes reducing high unemployment a political, economic, and moral challenge of the highest order.