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