Long-term unemployment in Canada and the US

The more I look at the US, the more I see unpleasant parallels to Canada's experience of the 1990's - what Pierre Fortin called The Great Canadian Slump. Even after we emerged from the worst of the 1990-91 recession, we still had to deal with a large current account deficit, out-of-control government deficits and significant NAFTA-induced sectoral shifts. The outlook for the US is depressingly similar, although their sectoral shifts are associated with re-allocating resources away from construction and finance.

One thing in particular jumps out at me: the spike in long-term unemployment in the US. Unemployment is bad for many reasons, but long-term unemployment is particularly harmful. As the duration of the unemployment spell lengthens, workers may find it harder to find work that makes best use of their skills; many will either start over in another field or abandon the work force entirely. Either way, human capital is destroyed and the economy's productive capacity is diminished.

Here are graphs of the number of people unemployed for 27 weeks or longer, expressed as a percentage of the working-age population and as a percentage of the total number of unemployed. The data are not seasonally adjusted.

I suspect that we'll be hearing the expression 'jobless recovery' quite frequently in discussions of the US economy over the next few years.

Comments

[Nick Rowe]

It almost looks as if you got the colours switched in 2002!

Productivity: Normally in a recession, output falls proportionately more than employment, so measured labour productivity falls. (Okun's Law). Am I correct in thinking that in this recession, Canada is roughly following Okun's Law, but the US is definitely not? (US labour productivity just increased massively).

Labour hoarding is the usual story for Okun's Law. But firms won't hoard labour if they know there's a big structural shift underway.

[Patrick]

Krugman on Okun's Law and the recession:

http://krugman.blogs.nytimes.com/2009/07/31/how-far-out-of-line-is-the-unemployment-rate/

[Frances Woolley]

Craig Riddell wrote a paper that broke down the reasons for the Canada/US unemployment rate difference in the 1990s. As well as the usual macro stories, there were a couple of other things going on
- Canada's much more generous social assistance and unemployment insurance. At one point in the 1990s around 10 percent of Ontario's population was on social assistance. The structure of Canadian social programs has changed a lot since that time making work more attractive.
- the US locks up so many people, especially people who have a high risk of unemployment, that it actually makes a perceptible difference to their unemployment rates.
( I can never figure out what the massive number of illegal immigrants in the US does to their labour stats).

I agree with you, Steve, that the US is facing some rough times in the next few years and has a lot of adjusting to do. But it's in some ways a more profound transition than Canada's in the 1990s. We had a straightforward structural adjustment. They're going from being the world's only superpower to once-the-head-of-a-glorious-empire - so post-war Britain but different.

[Phillip Huggan]

Comparing a ratio of the two charts over time would help set income taxes. I still like the ratio of new jobs available to applicants for the purpose of conveying info to workforce. The latter would be nice to have updated daily as part of evening news, at least at south of the border unemployment levels.

Of course they'll interview Death Panel experts instead.

[Declan]

Except, interest rates were kept relatively high in Canada during the early/mid 90's and as soon as they came down the economy improved - but in the U.S., interest rates are already 0. Also, debt levels in the U.S. currently (private, not government - although this is changing) are much higher than they were in Canada in the 90's.

[Too Much Fed]

From:

http://www.marketwatch.com/story/job-openings-down-50-from-the-peak-in-2007-2009-09-09?siteid=yahoomy

"In July, there were 6.05 unemployed people for every job opening, according to the most recent data on labor turnover. In December 2007, when the recession began, there were 1.72 unemployed people for every job opening."

See the chart there too.

Is greenspan proud that his war on labor thru cheap labor outsourcing, cheap labor legal immigration, and cheap labor illegal immigration is succeeding???

[Too Much Fed]

"I suspect that we'll be hearing the expression 'jobless recovery' quite frequently in discussions of the US economy over the next few years."

Are jobless recoveries related to poor labor policies for the workers (including trade policy)?

[Too Much Fed]

"Productivity: Normally in a recession, output falls proportionately more than employment, so measured labour productivity falls. (Okun's Law)."

How about a different concept I call "forced productivity"?

That is ...the stock price and corporate profits are down, therefore some people's hours will be cut (including firings) and rest of the people will be forced to work harder each hour.

Sign of an oversupplied labor market???

[Andrew F]

Fed: How could Greenspan be responsible for labour or immigration policy? Sounds like you're trolling.

[Patrick]

The whole "Chinese/Indians are stealing our jobs" thing really bugs me. Firstly, because it isn't true; I've never seen any credible evidence to support the claim. It also strikes me that there is also an element of racism. Where is it written the rich (mainly white) countries have a monopoly on good jobs? I can understand complaining about China; they aren't a free market economy. But India? If Indian IT workers can compete with IT workers in other parts of the world and make a living wage (by Indian standards) doing it, then I say good for them!

[Andrew F]

I also think that people don't appreciate how much it increases our standard of living to be able to get skilled professional services like IT for pennies on the dollar. Simultaneously, these positions pay very well by Indian standards, and are contributing to a rising standard of living there, supporting a growing domestic economy and helping to lift millions of desperately poor people from poverty.

Much better than one unionist in North America can afford that fifth television than a dozen in India or China or Brazil being able to afford health care or education for their children.

[westslope]

Meech Lake. L'accord de Lac Meech.

The Meech Lake constitutional accord was supposed to formally bring Quebec into the federal camp with dignity. Political rent-seekers such as First Nations and Newfoundlanders perceived that the Accord might weaken the ability of the federal government to transfer wealth to those parties while many other Canadians balked at formal recognition of the asymmetrical character of Canadian federalism, (if you ignore reality does it go away?), and the constitutional veto accorded Quebec.

Out of this failed accord, grew the federal Quebec independence party Le Bloc québécois, renewed support for the provincial governing independence party le Parti québécois and another referendum on 'sovereignty' that came awfully close to receiving majority support, and would have seen Québec negotiating a European Union-style relationship with the rest of Canada (ROC).

Presumably the Canadian risk premium rose considerably. The open question was who would pay for the debt run up trying to appease regional special interest groups?

Moreover, we got to listen our own home-grown, narrow-minded, prejudiced red-blooded English Canadians go on frequent Archie-bunker style sectarian rants. (Technially, it isn't racism; racism is something generous Canadians save for aboriginals and recent immigrants.)

All this to say, I don't see any parallels with contemporary American history. The Red and Blue state divide is not comparable. The on-going Culture Wars do not threaten the integrity of the US federal nation state.

[John Benton]

The on-going culture wars may be more serious than you think. The 'fall from empire" scenario is not going to go down well here. A decline in lifestyle/living standards is not going to go down well here. An economic recovery that significantly lags others areas is not going to go down well here. A global recovery that increases energy prices (gasoline) at a time of high unemployment and low wages in the U.S. will not go down well here. I could go on, but the upshot is that fear, anxiety, anger, and universal distrust of commercial and governmental institutions is forming a vicious atmosphere in U.S society. Significant ugliness appears inevitable. Whether it is manifested internally or externally depends on events, but I do believe that this federal nation state is on the very cusp of becoming ungovernable.

[Too Much Fed]

Andrew F: see this link titled

Greenspan Says Illegal Immigration Aids U.S. Economy

http://www.bloomberg.com/apps/news?pid=20601103&sid=anIvyAQU6XRk&refer=us

IMO, with greenspan it is all about cheap labor and cheap debt except for economists, traders, media people, and certain politicians.

[Too Much Fed]

For Stephen & Nick, so you are saying we need more jobs? Is that correct?

[Stephen Gordon]

Sure. But there must be better ways of creating them than by making the world's poor even worse off, or by denying them the chance to escape poverty.

[Too Much Fed]

For Stephen, OK.

I'm waiting for Nick's response.

[Phillip Huggan]

If we have a impending 1 or 2 trillion dollar health deficit the solution will be different depending on whether we choose to continue running $50+B/yr deficits. A CPC route makes solvency much more important than unemployment. Whereas if you don't just keep subsidizing oil sands and finance, you have some flexibility to have this debate.

Perhaps there can be two questions or threads: One for Flaherty magicland where AGW isn't real and the whole country has oil sands revenues and tax breaks, and reality.

[Phillip Huggan]

...to be constructive: oil (and I assume sands) is a capital intensive industry. Tax it more and cut taxes to small businesses (are labour intensive). The NDP restored the 26% Pre-CPC tax rate. Sounds anti-AB/SK/NFLD/NS but the industry is large enough to macro affect unemployment if you don't tax it at least like others if not more (let oil cheat and buy labour intensive wind if we can capture some more of supply chain that at present). Given peak oil I'm sure their business model will survive. For banks, they break even when rest of world bails out. Give them incentives when buying stablizing investments like India finance ownership stakes and Farm loans, staffing company stakes, Gold loans, etc. To the economist in me, hate to say, solution is to do the opposite of everything CPC did.

[westslope]

John Benton.

I believe that you are right. I believe the on-going 'culture wars' in the USA have a greater economic impact than current models and data are capable of recognizing.

I also believe that 'culture wars' in the mid-1970s following the humiliating defeat of the USA in Vietnam helped drive the productivity stagnation that characterized that period.

Now whether these 'culture wars' can compare to the looming and perceived 'break up' (actually it would have been a re-organization) of Canada by evil separatists is another matter.

[Too Much Fed]

OK. I got a second yes from Nick at:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/09/john-cochrane-paul-krugman-and-says-law-again/comments/page/2/#comment-form

I think there is a fallacy there. Do we need more jobs OR FEWER WORKERS???