Chapter 10
Some facts about
Canadian labour markets
ECON320
Prof Mike Kennedy







The general picture
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
UR cyclical (right scale)
UR
NUR
Why we worry about unemployment
•  The social cost of unemployment
– At the individual level it can be very costly (loss of
income, perhaps need to move, a feeling of low
self worth, etc.)
– At the level of society, a loss of output to the
economy as well as a cost to taxpayers
Two useful relationships
describing the labour market
•  Okun’s Law, which draws a connection between the
output gap and cyclical unemployment
•  The “growth” version of Okun’s Law is:
•  The Beveridge Curve, connects employment vacancies
to unemployment
Y −Y
Y = −2.0(u−u)
Vac = −αu
∆Y
Y =
∆Y
Y − 2.0∆ u,   where ∆ u = 0
rategap
R
Uac negative
u
Okun’s Law
(the growth version Canada)
∆ln(GDP) = 0.006 -1.29x∆(UR)
(2.29)
R² = 0.41
Q1-1982 to Q2-2016
-4%
-3%
-2%
-1%
0%
1%
2%
3%
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Growth of GDP
Change in unemployment rate
Okun’s Law
The cyclical version (Canada)
Output gap = –1.73(UR-NUR)
(18.54)
R² = 0.72
Q2-1982 to Q2-2016
(orange = 2008-09 recession)
-4%
-3%
-2%
-1%
0%
1%
2%
3%
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Output gap %
Unemployment rate - natural rate
YD peuist
Okun’s Law
(the growth version USA)
%∆(GDP) =0.0078 -1.66∆(UR)
(10.0)
R² = 0.46
(Q2-1948 to Q3-2016)
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0
%∆(GDP)
∆UR
Okun’s Law
The cyclical version (USA)
Output gap = -1.75(UR-NUR)
(30.0)
R² = 0.77
Q1-1948 to Q3-2016
(orange = 2007-09 recession)
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0
Output gap %
Unemployment rate - natural rate
Okun’s Law
The cyclical version (US)
(Similar time period to Canada)
Output gap = -1.52(UR - NUR)
(21.2)
R² = 0.76
Q1-1982 to Q3-2016
(orange = 2007-09 recession)
-6%
-4%
-2%
0%
2%
4%
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0
Output gap %
Unemployment rate - natural rate
Okun’s Law seems to apply to a
large number of OECD countries
Country Coefficient t-statistic R2
Australia –1.28 7.72 0.66
Belgium –1.06 5.92 0.53
Canada –2.23 8.26 0.69
France –2.25 6.95 0.61
Germany –1.26 3.26 0.30
Italy –1.28 6.47 0.57
Japan –3.53 10.02 0.76
Netherlands –1.39 7.76 0.66
Spain –0.99 18.44 0.92
Sweden –1.21 6.90 0.61
United Kingdom –1.70 8.08 0.68
Source OECD Economic Outlook No 102
Dates 1985 to 2016 except Germany 1991 to 2016
Y BL
d
Okun’s Law also applies to Canada’s
larger provinces
Provinces Coefficient t-statistic R2
Newfoundland –1.03 2.32 0.13
Prince Edward Island –1.17 3.88 0.30
Nova Scotia –0.58 1.55 0.06
New Brunswick -0.91 1.42 0.06
Quebec –1.87 13.28 0.84
Ontario –2.12 11.53 0.79
Manitoba –2.21 6.08 0.51
Saskatchewan –2.24 3.62 0.27
Alberta –1.62 6.11 0.52
British Columbia –1.40 7.02 0.59
How well does the Canadian
labour market work?
3.0
3.5
4.0
4.5
5.0
5.5
2.5 4.5 6.5 8.5 10.5 12.5 14.5
Ln(HWI)
Unemployment rate
The Beveridge curve
(Jan 1962 to Dec 1988)
(red = start; black = end)
Note: HWI = help wanted index
Beveridgecurve
I shift out
How well does the Canadian labour market work
(con’t)?
3.0
3.5
4.0
4.5
5.0
5.5
2.5 4.5 6.5 8.5 10.5 12.5 14.5
Ln(HWI)
Unemployment rate
Beveridge curve
(Jan 81 to Apr 2003)
(red = start; black = end)
Note: HWI = help wanted index
A look at the US labour market
7.6
7.8
8.0
8.2
8.4
8.6
8.8
3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0
ln(vacancies)
Unemployment rate
US Beveridge curve
Dec 2000 to Sep 2016
(red = start; black = end and orange = great recession)
Duration rises with unemployment
and this relationship is shifting up
5
10
15
20
25
30
2.5 4.5 6.5 8.5 10.5 12.5 14.5
Duration
(26 weeks)
Unemployment rate
Red = 1976; black =2015
How important is frictional and
search unemployment?
•  One way to think about the change in unemployment
•  In terms of rates where we assume that the labour forces (L)
is unchanged we get:
•  In equilibrium, where ut+1 = ut we have:
•  Assuming that s = 0.02 and f = 0.8, this gives at best about 2.4
to 3.8 percentage points (assuming that f = 0.5) due to
frictional and search unemployment – the rest must be
structural
Ut+1 −Ut = stEt − ftUt
ut+1 = (1− st − ft )ut + st
u = ss+ f
ut+1 −ut = st
Et
L − ftut  and since ut =Ut / L and Et = L −Ut then
separationXE
I
Don't charge
f is the finding
Some reasons for long-term
or structural unemployment
•  Structural unemployment can arise because of:
–  Union power which maintains a real wage above that
needed to clear the labour market
–  Poorly trained labour force
–  Government policies that hinder the functioning of the
market
•  Excessive regulation
•  Overly generous unemployment benefits
•  Minimum wages that are too high
–  Efficiency wages
–  Frictions in the labour market do not appear to be
sufficient to cause high rates of structural unemployment
I SRAs
AD
The path of the natural rate over time
(OECD estimates)
GRC
IRE
ITA
PRT
ESP
SWE
0
2
4
6
8
10
12
14
16
18
20 AUS CAN FRA
DEU GRC IRE
ITA JPN KOR
NED NZD NOR
POL PRT ESP
SWE CHE TUR
GBR USA Euro area (15 countries)
I
y
Across countries the natural rate has fallen, except for a number
of crisis-affected euro-area countries and Turkey (see*)
*
*
*
*
*
0
2
4
6
8
10
12
14
16
18
ESP POL GRC IRE FRA ITA Euro
area
CAN DEU SWE TUR AUS GBR NZD PRT NED USA NOR KOR JPN CHE
%
Source: OECD Economic Outlook
1995-2000
2010-2018
Average 2010-18
a as ly g