Interpreting job market statistics demands a lot of care right now. The pandemic has muddied the statistical waters and created the illusion that unemployment rates are significantly higher in Canada than in other countries.
Statistics in the service of partisan politics are often, to put it gently, rather elastic in their meaning, so it is natural to wonder: do we really lead the pack in the dubious distinction of having the highest rate of unemployment?
The COVID19 crisis has unleashed an economic crisis that is unprecedented in its speed and in its depth, making these very interesting times to study macro-economics.
Lecture 9 of Economics for Everyone describes the anatomy of the business cycle, and relates these swings in macroeconomic activity to a statistic that, as much as any other, speaks directly to the lives of citizens, the unemployment rate.
So in this lecture we describe the anatomy of the business cycle, how macro-economists link changes in GDP from its potential to changes in the unemployment rate, and finally just exactly what is this statistic called the “unemployment rate” and how is it measured by statistical agencies.
Today we are continuing to talk about monetary policy. We have been discussing the issue of how the Federal Reserve Bank should respond to the extent of slack in the economy: when there is high unemployment, the Fed should be increasing aggregate demand, but at full employment more aggregate demand would lead to inflation. It is a difficult problem to find this balance because of lags in the process and host of measurement issues.
I’m going to start talking about monetary policy today, and continue with it in the next lecture, and again next week.
So think about the Federal Reserve, and their decisions directed to monetary policy. They have just met, and decided not to change anything, but they are looking ahead to March to see if they will raise rates as they did in December.
They know where the economy is, and where it has been, and infer where it is going in order to decide to do something to nudge it in one way or another. So I have handed out a sheet, a bit of information certainly used by the Fed, and the investment community in trying to decide what are they going to do.
Table 1 on the left hand side of the sheet shows what happened to GDP and its components in the last two quarters, based on what was released on January 29th. Table 2 on the right hand side shows the contribution of each component to the change in GDP.
The Fed likes to say that they have a plan, but what they actually do is data dependent and they are adjusting policy accordingly. Here is one example of new data, and we have to recognize that there are problems with actually measuring real GDP.
What do I learn from these numbers? And if I were at the Fed I would have to recognize measurement problems in trying to interpret them.
The unemployment rate in the United States fell to 5.3% in June, while the Canadian rate as of May stands at 6.8%. When Statistics Canada releases the June numbers on July 10th they are unlikely to show much improvement.
But when comparing the two countries it is important to remember that there are subtle differences in statistical methods that tend to push the Canadian statistic higher than the American. The unemployment rate in Canada would be 6.1% if it were calculated using US methods, rather than 6.8%
The gap between the two may be significant and it may grow even larger, but it is not as big as the official statistics suggest. See this 2012 post for an explanation.
Arthur Cecil Pigou made lasting contributions to the science of economics, but for macro-economists of a certain generation he will always be considered a laughingstock.
Professor Pigou taught at Cambridge University during the first decades of the 1900s, and had the misfortune of making a cameo appearance in the opening chapters of what is arguably the most influential economics book of the 20th century, The General Theory of Employment, Interest, and Money, written with eloquence, and at times a very caustic pen, by his colleague at the same university, John Maynard Keynes (whose last name, by the way, sounds like “Canes”).
Pigou’s big mistake was to suggest that the unemployed themselves were to be blamed for their predicament. To Mr. Keynes, the notion that the persistently high unemployment rates of the Great Depression were in some sense voluntary was worthy of scorn and ridicule.