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
