ROCHON on: A tale of two economies? Making sense of recent US and Canadian labour market data
Louis-Philippe ROCHON
Associate Professor, Laurentian University
Co-Editor, Review of Keynesian Economics
Follow him on Twitter @Lprochon
With data on the performance of Canada’s labour market released today, many economists and pundits on both sides of the 49th parallel are arguing that what seems to be emerging is two very clear and different paths for the US and Canadian economies. But that interpretation is not exactly correct.
Indeed, the US economy seems to be outperforming expectations, according to labour market data released last week, according to which the labour market is showing continued strong signs of life. In February alone, the US economy added more than 295,000 jobs, making it the 12th month in a row where monthly job creation is at least 200,000.That seems quite remarkable, especially since job creation is widespread across all sectors and demographics, suggesting a firmly-rooted recovery. Moreover the unemployment rate has shrunk to 5.5%, which is where it stood in May 2008. Finally, as the Secretary of Labor, Thomas E. Perez, boasted last week, February marks the first time in more than 3 decades, unemployment fell in all 50 states.
What more could you say? Apparently, the US is on course for a strong growth spurt, fuelling fear of inflation, which may convince the Federal Reserve to raise interest rates sooner than expected.
But we mustn’t believe everything the man behind the curtain is saying. As always, statistics can be used to spin any good story. A closer look reveals a somewhat different story, and in fact, a story that is much closer to our own. In the end, both the US and Canadian labour markets are much closer in character than most pundits would care to admit.
Since unemployment rates by themselves do not tell the whole story, we must dig deeper to get a fuller story.
First, there is still too much part-time employment, and the current employment ratio (the ratio of employed individual to the overall labour population) is still low, at 59.3%, a full 3 points below where it stood before the recession (labour participation rate sits at a low of 62.8%). This means that there is still an important number of workers who still desire full time jobs but just can’t get them, and left the labour market discouraged.
As American economist Thomas Palley wrote recently (see here), close to 22 million American workers are still looking to work more. Clear evidence, he says, that the US is still far away from full employment. In fact, Bucknell University professor Matias Vernengo, argues (see here) that if participation rates were at the same level today than at the end of the Clinton boom years (67%), unemployment rate today in the US would be close to 12% and not 5.5% Now that’s a difference story indeed.
And then there is wage growth, which remains relatively weak. In fact, wage increases have averaged 0.01%, well below January’s 0.5% gain. So wage gains may in fact be slowing down. More importantly, February’s paltry wage gain is still way below productivity gains, which means there is no threat of inflation any time soon or on the horizon.
This brings us to economic policy. It is now widely expected that the US Federal Reserve will begin raising interest rates, and possibly as soon as June if not earlier. But would this increase be justified.
Given the relatively weak labour market still, and the lack of any inflationary pressure (some pundits see the inflation threat everywhere), a rate hike now would seem to be premature.
All this brings us back to Canada.
Recall that in January, while labour markets created more than 35,000 jobs (although I expect those numbers to be revised downward), these were all part-time and self-employment, thereby emphasizing the rather precarious nature of Canadian labour market. This followed a December where the economy actually shed jobs.
The latest job numbers for February are far from encouraging. In February, the Canadian economy again shed jobs, albeit less (1,000), but the unemployment rate increased back up to 6.8% from 6.6%. As I said before, we are heading in the wrong direction.
But there is more. I calculated the real rate of unemployment. If the labour force participation in Canada were at the same level as at the beginning of the crisis, then Canada’s real unemployment rate would be closer to 9% today.
This is as far away from full employment as we can get.
It is becoming overwhelmingly clear that both economies are suffering considerably, and both economies are still far from a sustained recovery, although Canada’s economy is doing far worse.
The Federal Reserve should not be raising rates. This is not the time. In both countries, what we need is fiscal stimulus and massive investments in public infrastructure. Unfortunately, ideological and political nearsightedness will prevent that from happening, virtually guaranteeing a prolonged period of misery.
In terms of US, the Federal Unemployment Benefit program was cut in December 2013 meaning unemployment benefit duration (availability) was cut from an average of 53 weeks to 25. I believe this played a strong role in the rise of jobs added. Yet, as mentioned before, a closer inspection of the nature of jobs added is required to understand if the rise is due to household desperation for income. This theory I believe, could have lead to the rise in part-time jobs with non-income earners of the household joining the labor force, though this would be contrary to the author’s findings where the participation rate has fallen.
I would like to know any reader’s/author’s opinion if whether the benefit duration cut has had a positive impact on the labor market.
In my opinion and findings, I believe the short term gains in rising employment will not compare to the long-term loss in potential GDP as can be seen by the stagnant wage growth, an indication that marginal productivity has not increased and that this austerity-motivated move will lead to an even bigger issue.
I have a report coming out soon with the CCPA that looks at many of these labour market variables.
Real year over year wages are down substantially, part time work for economic reason is still at recession levels, temporary workers have increased dramatically, and several other variables are still within the recession like territory.
And this is just before we see more impact from the oil price drops- which pose at least a short run hurdle- assuming these drops reverse the affect of the dutch disease- which according to the literature- once a dutch disease victim it is a long term ailment due to the oil to dollar linkage and speculative rituals.
So I do wonder how will the Bank of Canada keep rates lower- which obviously our economy will need-given the potential for a US rate hike?
How can we have different monetary strategies- given the integrated nature of the financial system?
Thanks Paul. I look forward to reading it. I think your last comment : “How can we have different monetary strategies- given the integrated nature of the financial system?” is the wrong question. The answer is we can certainly have very different monetary strategies since interest rates are exogenous. This is not to say that there won’t be any consequences. Look at what is happening to the US $ on speculation of higher rates? My take is we won’t see higher interest rates in the US in 2015. If Yellen is reading the same data as we all are, I think there is plenty of room to delay a rate hike. In fact Yellen has already stated there are no inflationary pressures (although I disagree with the causal relationship between interest rates and inflation, but that is another issue).
But even if this is not the case and rates stat moving up in the US to 0.25 or 0.50 and our rates go down to 0.50, there may be some movements in the market and pressure on our exchange rate downward, which I don’t see as bad.
The real question we need to ask is where is fiscal policy?
Yes Fiscal policy- seems like it is not within the realm of thinking from any western nation.
What about transforming QE into some kind of forced lending whereby the QE is attached to definitive lending practices by the banks.
To me- the neo-cons refuse to empower the state in any way shape or form. Rather than allow fiscal stimulus they would rather print and issue more debt to banks. So potentially this is more of a question of power and profits in the age of financialization.
It is precisely those consequences that could pressure our rates to stay with the US. I agree they do not have to- but as we know- our bankers will use such gravitational pull to ensure the BOC matches such rate. There has always been a coordination of some sorts for rates. Anyway- I would still stay with my prediction that if the US raises- we will feel the heat from our bankers to match such rate increases. Not sure how much any more – such independent bank rates will actually have on the dollar- given the linkage to oil prices.
I am all for lower exhange rates, I just ran a graph here of manufacturing and exchange rates to show how tight the two appear to be.
https://www.facebook.com/photo.php?fbid=10153119871390851&set=a.84820470850.112278.737015850&type=1&theater¬if_t=like
On the exchange rate, I don’t see a strong correlation between $ and exports. I think it depends more on US growth.
the correlation is there- but in terms of causation- the exchange rate it is definitely some kind of intervening variable riding along with the variance in US economy health. The whole notion of the dutch disease is premised on this relationship – so does that mean you feel the dutch disease was not a factor in the decline in the Canadian economy.
Interesting AFter I wrote that, the question of Dutch Disease sprung to mind. I generally do agree with the premise of it, yes. But I do think that foreign growth is a stronger causal factor.
it is a difficult causal stream to sort through- I know the BOC has its models, and has discounted a lot of the dutch disease and sways to the growth side of things.
Like many things it would take more research- for example- a good portion of the forestry industry coded in the manufacturing was hit by the recession and was hollowed out- and we are seeing a slow erosion of the auto sector due to growth.
So it is one of those questions that remain on the economy- what will the future scenarios of Canadian economy be in terms of growth- if we focus on manufacturing more- what are the parameters of growth- what do we allocate to the dollar valuation now that it is moving back to PPP or what parameter to the US economy.
And of course other policy options- the one I like is the one you promote- fiscal stimulus- and in the form of strategic investment into several areas.
By the way- congrats on new book- The Encyclopedia of Central Banking. Something very much needed. Thanks for your hard work on this.
PPP? Who believe in that?
Thanks. he Encyclopedia was a long process. Glad its over. Now turning my attention to The Encyclopedia of Post-Keynesian Economics