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Hmmm. My (tentative) interpretation of Figure 2:

When monetary policy is good, and the economy is stable, we tend to see a low correlation between investment and employment (the composition of NGDP changes, but NGDP and employment grow smoothly).

When monetary policy is bad, we tend to see a high correlation between investment and employment. Monetary policy shocks cause shocks to all components of NGDP in the same direction, and to employment.

Holding relative prcies constant, you'd expect there to be a close correlation between investment and employment. Presumably part of what is going on here is changes in the relative price of labour and capital inputs arising from changing values of the C$ over time. All else being equal, a low dollar would tend to make imported capital goods more expensive and domestic labour cheaper. Faced with that phenomenon, no wonder Canadian employers might choose to hire more workers and invest less in capital.

> Faced with that phenomenon, no wonder Canadian employers might choose to hire more workers and invest less in capital.

Does that actually make sense with the data? The most recent period of weakest correlation has had the strongest Canadian dollar, and the Canadian dollar was much lower during the 80s and early 90s -- when the correlations were strongest.


Fair point, but I wonder if the issue isn't changes in relative price of capital and labour. With a steady relative price, one might expect the capital/labour ratio to stabilize. Any increase in production requries a corresponding increase in both capital and labour. On the other hand,if the relative price changes, firms will have a different equilibrium capital/labour ratio. In the short run, they might choose to increase production by hiring labour and not capital (or vice versa).

Also, the figure 2 is a bit misleading, because it's a 10-year rolling average correlation (so the high correlation in 2010 isn't neccesarily linked to the high dollar). I'm not sure so the high correlation in 2010, actually reflects the correlation over the prior decade. (Is it me? I'm not at all sure how to interpet that. How does a 10 year rolling average fluctuate so dramatically over 5 year spand from 2006-2011? Is a rolling average correlation even meaningful? A steady moderate correlation looks the same as a time series that fluctuates between zero and 100% correlation).


The 10-year rolling contemporaneous correlation reported in Figure 2 is helpful in seeing the information in Figure 1 in another way: how employment and investment have moved together over the medium run (a decade) in Canada - a stylized fact. Notice the joint pattern in Figure 1 since about 1995. The shape of the 10-year correlation reflects that. Also, the decrease correlation in the last 10 years is partly driven by the relatively flat employment-to-population ratio since 2010, and the rising I/GDP ratio. The increased contemporary disconnect reflected in the low correlation clearly striking and most likely reflects structural changes in the labour market.

The level of employment relies on the amount of investment? I doubt it. Suppose every investment in the country was destroyed: all houses were demolished, all machinery and factories destroyed. We’d then temporarily go back to the stone age. But why would that preclude full employment?

Everyone would be busy killing wild animals for meat, making fur coats from bearskins etc. And gradually with our knowledge of how to farm, make steel, etc etc, we’d get back to an industrialised economy.

Unfortunally not as all the easy to mine and process ores have all been used up...

The disconnect could be a reflection of over-investment in production capacity for a commodity exporting economy, which then has to fully utilize said capacity over time before new (over) investments need to be made. The downward trend over time in the correlation however, could reflect the impact of technology in reducing the levels of labor needed to maintain capacity. How have wages responded to relationship between investment and employment?

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