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The gap between US and Canadian unemployment rates is bigger than it appears

May 4, 2012

At 8.1% the unemployment rate in the United States is about one percentage point above the 7.2% currently reported for Canada, but this gap would be almost two percentage points if the Canadian rate was measured in the same way as the American.

This revealing picture from the recent Canadian federal government Budget paints a more accurate portrait by using unemployment rates defined in a similar way across the two countries.

The left panel shows the evolution of employment compared to its level in 2006. The striking fall and incomplete recovery in the US is all the more evident by the comparison to Canada. These numbers can be confidently compared because they are defined and measured in the same way on both sides of the border (though it would be more appropriate to express them as a percentage of the working age population as I suggest in this post).

The right panel shows that the gap between the American and Canadian unemployment rates is much bigger when a comparable Canadian statistic is used in place of the headline measure regularly reported by Statistics Canada.

While the statistical agencies in both countries use the same methods to describe the jobs market, the gap between the unemployment rates rests on a couple of subtle differences in the criteria used to classify someone as unemployed.

It is a common mis-perception that these statistics are based on government programs like unemployment insurance, and the administrative data generated from them.

I remember giving a briefing to senior members of a provincial opposition party some years ago, and no one in the room was more shocked that “unemployment”, as reported by Statistics Canada, was not defined as the number of unemployment insurance beneficiaries than the person who was to eventually become the minister of finance.

But he was not alone: this point is a regular item in the briefing books that are prepared for new ministers, and a moment’s reflection makes clear that it is important that statistical agencies not base their numbers on unemployment insurance data. If they did a government would appear to change the number of unemployed by making unemployment insurance more or less generous, and those who do not qualify for the program—the young without much job experience looking for their first job, or others who have been unemployed for a very long time—would never be part of the tally.

For these reasons the Bureau of Labor Statistics and Statistics Canada base their calculations on surveys:  the Current Population Survey in the United States and its Canadian counterpart, The Labour Force Survey, are conducted monthly and use a sample of between 50,000 and 60,000 households to represent the working age population in each country, those 15 years of age and older.

In the United States 15 year olds are not included in the calculations because, as the Bureau of Labor Statistics explains, “child labor laws, compulsory school attendance, and general social custom in the United States severely limit the types and amount of work that these children can do.” In Canada (and for that matter also in the European Union) they are included.

But this does not play a large role in determining the gap in unemployment rates.

Rather, while the surveys ask a series of very similar questions in order to classify respondents as either being Employed or Unemployed, it is the way in which these questions are asked—particularly the distinction between “active” and “passive” job search methods—that drives an important part of the gap.

To be considered “Unemployed” a survey respondent must not have done any work for pay during a particular week of the survey month, must be available for work, and—most crucially—must have done something to find a job during the last four weeks.

The US makes a distinction between job search activities that involve “active” measures (activities that on their own could lead to a job offer), as opposed to “passive” measures (activities that require some additional effort to obtain an actual job offer).

Placing or answering a job ad, visiting employment agencies or businesses, making job inquiries and sending applications as well as attending interviews are all examples of active search methods. Asking family and friends for jobs or leads is also considered an active measure.

Passive measures are more along the lines of information gathering, like simply looking at job ads in the newspaper or on the internet.

In the United States only active measures will lead to someone being designated as “unemployed”; in Canada either type of activity will do the trick.

The crux of the matter is that flipping through the want-ads in a newspaper gets you classified as unemployed in Canada, but not in the United States.

A nicely written paper by Constance Sorrentino, an analyst with the Bureau of Labor Statistics, carefully places these concepts in an international context, summarizes the research on the Canada-US unemployment gap, and explains all the differences in statistical methods between the two countries.

Passive search methods have been on the rise because as the duration of unemployment spells increases, the longer-term unemployed become more discouraged and therefore more likely to uniquely use them as they step closer and closer to giving up looking altogether.

Writing in 2000 Sorrentino claims that a rise in the use of passive job search methods in Canada is an important part of the explanation for the difference in unemployment rates. If the Canadian unemployment rate were adjusted to US concepts it would be reduced by 1 percentage point.

As the picture from the Budget makes clear, this is exactly the case now.

The Canadian unemployment rate would be lower if only those actively looking for a job were used to calculate the unemployment rate. This subtle difference in statistical method implies that the unemployment rate gap between the two countries is much bigger than it seems when looked through the lens of the official statistics.

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19 Comments
  1. Excellent post, in terms of educational value and public interest.

    I think it’s also helpful to look at it the other way around. Essentially Canada counts more “discouraged workers,” people who want work but are not actively looking because they’ve mostly lost hope (at least with respect the job market of the moment).

    Arguably, counting discouraged workers is a more accurate way of counting the unemployed. The basic story is the same – a 2% gap at the moment between Canadian and U.S. unemployment rates. But one could also state it as the U.S. rate being 1% higher than it seems rather than the Canadian rate being 1% lower.

    Counting discouraged workers also leads to an unemployment rate that behaves in a more intuitively-correct way. Discouraged workers may go from passive search to active search as the economy improves, which in Canada would not affect the unemployment rate — statistically and intuitively, there are still a lot of people looking for work. But in the U.S., as discouraged workers re-enter the active job search group as the economy improves, it causes the unemployment rate to go up, even though the actual number of unemployed hasn’t really changed and the economy may be looking up a little.

    Either way, we have to keep working to help people find jobs. Again, great post.

    • Thanks for the feedback, which brings a helpful and broader perspective to the post.
      My own view is that a single statistic cannot paint a complete picture of the extent to which human resources are under-utilized. I have noted in other posts that Statistics Canada produces a whole host of “unemployment rates” — some of which include discouraged workers — to help offer this picture. The headline measure is of most value in charting the direction of change, but even with this objective it is important to understand whether employment or labour force participation decisions are the drivers.

  2. Dian Mo permalink

    Misleading charts:

    1.) Left Chart point 2006 & 2011: the employment rate in Canada 62.8% (2006) & 61.8% (2011) (http://www4.hrsdc.gc.ca/.3ndic.1t.4r@-eng.jsp?iid=13#M_1)

    We don’t know how this author getting such total employment index from 100 in 2006 to between 106% ~108% in 2011?

    2.) Notes: sources StatCan & BLS —misleading

    Correct way: {Notes: Chats’ original date from StatCan & BLS & methods ???}

    • Thank you for your comments.
      The chart is taken straight from the Budget papers produced by the Department of Finance, and can be seen as Chart 2.9 at this link.

      The left panel refers to employment levels, not the employment/population ratio. In fact, in my post I say that “It would be more appropriate to express [the levels] as a percentage of the working age population”, and I offer a link to a previous post that shows how the E/POP ratio has evolved somewhat more slowly in Canada. This is also particularly so in the United States.

      What the graphs show is not the Employment/Population ratio, but rather for each country the number of employed in each year divided by the number of employed in January 2006. It should be interpreted as showing the percentage difference in employment in any given year relative to 2006. Therefore the picture is saying that the number of employed in February 2012 was about 7% higher than it was in January 2006 for Canada, but about 2% lower in the United States.

  3. Nick Rowe permalink

    Miles: “It is a common mis-perception that these statistics are based on government programs like unemployment insurance, and the administrative data generated from them.”

    Yep. I’ve heard this too, from educated well-informed people.

    Thanks for explaining the difference between Canada and US measures. I never knew that.

  4. Noni Mausa permalink

    So much of unemployment or employment lies in how it matches personal income needs, and also how many hours the worker sacrifices per paid hour of work. I wonder, are there any complex studies dealing with the all-found costs and benefits of most workers?

    Example: I am a semi-retired Canadian counted as “employed’, but frankly it only amounts to beer money these days. In the past three years my company has cut hours drastically, due to low sales. My half-time job the first year (20 hours) has now fallen to four hours a week. On the job, I look like a well-paid professional, uniform and everything, required to take bimonthly training sessions (paid by the employer) but after I leave work I go to my other job, dog-walking, and a third job, grocery deliveries, each of which pays equivalent to my “real” job, about $35/week. And all three of these jobs require I have a car. These days even paperboys need a car to do their deliveries, at 15 cents a paper. (Most of these fringe jobs only have employees because the pay is cash and not generally reported as income — a boost to the untaxed grey economy.)

    A full-time job has associated costs like travel time, mileage, and wardrobe (steel toe footwear, for example.). Three part-time jobs triple those associated costs while slashing benefits, resulting in double or triple all-found costs to the worker. My three jobs, 12 hours a week in all, require at least that in travel time and other costs. But my costs of living are no different, and let’s not even talk about home repairs.

    At 62 I will never have a “real” job again. Nor will many workers; who’s hiring seniors? Ironically, the only reason I can afford my part time jobs is because I have a small pension, which pays most of the bills and allows me a car. As pensions disappear among the poorer population, will seniors in the next generation, today’s 35 – 45 year olds, be able to afford to do the fringe work that was previously done by high school kids after school?

    Raw numbers don’t chart out these concerns. Is anyone watching?

    Noni

    • Thank you so much for sharing your experiences.

      Economists to in fact spend time thinking about these very issues. With apologies for sounding ‘academic’, careful analyses of labour supply—what determines the number of hours offered and worked—take into account the so-called “fixed costs” of looking for and having a job (which your experience illustrates clearly: things like transportation, clothes, tools etc). This is one of the factors we all need to appreciate in trying to understand the employment rate and the labour force participation rate. Statistics Canada is charged with simply producing these numbers as accurately and consistently as possible, but making meaning of them requires, among other things, awareness of the kind of issues you raise.

      The other important point you raise concerns the quality of jobs, and the security that is attached to them.

      Certainly, there are careful observers watching … but breathing real life into the numbers as you have done by sharing your story is a great service.

      best, Miles

  5. For anyone interested in following how the BLS looks at unemployment for the US, Canada and other countries by crunching raw data using their own methodology,

    http://www.bls.gov/fls/intl_unemployment_rates_monthly.htm

    Also, there is the Hamilton Project at the Brookings Institution which has been making projections of jobs recovery while factoring in monthly work force growth. Accounting for growth, and as shown in the first of the cited charts above (total employment), the US has not regained any of the 8.3 Million jobs lost to the Great Recession …

    http://www.hamiltonproject.org/papers/shrinking_job_opportunities/

    http://www.hamiltonproject.org/jobs_gap/

  6. I found Miles’ post informative in explaining the key difference between the official Canadian and American measures of unemployment. But count me among those readers who fear that it could too easily be misinterpreted as advocating that Canada adopt the more restrictive U.S. definition of unemployment, especially given the Globe headline:

    http://www.progressive-economics.ca/2012/05/05/corak-in-context/

  7. steveroth permalink

    And this is before you even consider the incarcerated population. It’s a debatable question how this should be accounted for, but the numbers are large:

    http://www.asymptosis.com/incarceration-and-unemployment-u-s-and-europe.html

    • Thank you. Yes, it should be underscored that these surveys are based on the “non-insitutionalized” population.

  8. So the real unemployment rate in the USA should include those in their prison system. Almost all of them if they were not in prison would also be unemployed or at the very least underemployed. Does the U.S. or Canadian EPOP rate account for prison inmates as unemployed?
    Are unemployment and crime not directly connected? as in weren’t almost all incarcerated inmates unemployed or shall we say majorly employed as criminals?
    If there is no accounting for incarcerated individuals in calculating things like EPOP doesn’t this produce an error on the side of artificially inflating the percent of employed persons vs the total population?
    If you are not already familiar with the Canadian economist Shadia Drury, University of Saskatchewan, you should check her out, she is brilliant , much like yourself. Mind, one doesn’t need to be very bright to outshine the dark hole of Fed Reserve, Chicago School, Tory pseudo economics!
    If you really want to understand the economics of Harper et al, one must check out his philosophy mentor – Leo Strauss!

    Cheers

    Michael Warhurst

Trackbacks & Pingbacks

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