1.

Explain how unemployment and the unemployment rate are defined

and measured. Define the labour force participation rate and the
employment rate and explore how these statistics provide additional
information on the state of the labour market.
2. Summarize the salient features of Canada’s unemployment experience
and how it compares to those of other developed countries.
3. Describe the dynamic nature of the Canadian labour market and explain
the implications of this feature for understanding movements in
unemployment.
4. Explain the meaning of the incidence and duration of unemployment
and describe how each contributes to the extent of unemployment.
 Unemployment:
 Those who are not currently employed and who indicate by
their behavior (e.g., actively search for jobs) that they want to
work at the prevailing wages and working conditions
 Naturally, how to categorize individuals as “unemployed”
differ slightly by surveys
 Labour Force Survey (LFS):
 Conducted monthly by Statistics Canada
 Individuals are categorized as unemployed if they fall under
one or more of the following three categories:
a) were without work, had looked for work in the past four
weeks, and were available for work, or
b) were on temporary layoff with an expectation of recall and
were available for work, or
c) had a new job to start within four weeks and were available for
work
 For categories b) and c), active job search is not required.
 Individuals are categorized as employed if they did any work for
a pay
 Compare the classification of “unemployed”
between the LFS (Canada) and the CPS (US):
 https://www.bls.gov/cps/definitions.htm#unemployed

 Based on the above definition, is the definition of

unemployment in the LFS wider or narrower than that of the
CPS?
 Based on the above definition, is the definition of unemployment
in the LFS wider or narrower than that of the CPS?
 Unemployment rate = unemployed / labor force

 Employment rate = employed / eligible population

 Labor force participation rate

= labor force / eligible population
b: growth rates are averages of compound annual increases
1929: Great Depression
Huge spike!

1981–82
Recession 1990–92
Recession

1974–75 2008-09
1957–58 Recession Global financial crisis
Recession
1939-45:
World War II

Unemployment statistics (and labor force statistics in general)

are key indicators for defining recessions
 C.D. Howe Institute Business Cycle Council
(Canada):
https://www.cdhowe.org/council/business-cycle-
council
 NBER (US): https://www.nber.org/cycles.html

 Often, a combination of indicators for real GDP and

employment are used to determine overall
economic activity and business cycles
 Canada

France
UK
US
Sweden
Japan
Germany

 1973 OEPC oil shock affecting certain European countries

 1990: German reunification
 2008-09: Great Recession
 Individuals may be without work and yet they desire to
work but are not classified as unemployed
 During recession where few jobs are available, the
phenomenon of the discouraged worker appears
 Discouraged workers are not employed and yet are not
seeking work because they think that no work is
available
 In general, the number of discouraged workers
increases during a recession
Access: https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201314E
The labor market is dynamic in its nature.
Best to think about concepts in terms of stocks and flows.
 Stocks measure the number of individuals in a given
state at a certain point in time (a “snapshot”)
 e.g., # of employed in August 2019

 Flows measure the number of individuals that have

changed “states”: employed, unemployed, and not in
the labour force
 e.g., # individuals who were employed last month, but are
unemployed this month
 Net vs. gross flows
Gross flow from
U to E: 235,000

Net flow from U

to E: 235,000 - Net change in
190,000 =45,000 unemployed: (190K-235K) +
(216K-184K) = -12K
All stocks and flows are in thousands and measured as averages of monthly
values from 1976 to 1991. Transition probabilities in parentheses.
• Job loss account for less
than 40% of all
unemployment
• New entrants and re-
entrants (i.e., those
moving from out of the
labour force to
unemployed) account
for a substantial
proportion
Incidence and Duration of Unemployment:
 Incidence of unemployment: the proportion of individuals in
the labor force who become unemployed in any period
 Duration of unemployment: the length of time spent in the
unemployment state before obtaining employment or
leaving the labour force
 In 2018, average unemployment duration in Canada was 18.3 weeks

 These are important concepts when thinking about the

effect of unemployment (on job finding probability, health,
household finance etc.) and designing unemployment
insurance
Incidence of
unemployment Incidence of
unemployment among
for those
those out of the labor
employed force (=216/6624)
(=1084/11100)

All stocks and flows are averages of monthly values from 1976 to 1991.
Transition probabilities in parentheses. All values in thousands.
 The unemployment rate during a given period can be approximated as I
(incidence rate) X D (duration)
 Unemployment rate is widely used as an economic
indicator of:
 Aggregate state of the economy (e.g., economic growth)
 Tightness/Looseness of the labor market
▪ “Tight”: closer to becoming full employment (low unemployment).
There are more jobs than people to fill them => upward pressure on
wages
▪ “Loose”: opposite of tight labor markets. More people than jobs =>
higher unemployment and downward pressure on wages
 The amount of “unutilized” labor supply
 Kroft, Lange, Notowidigdo, Tudball (2017), Long Time Out:
Unemployment and Joblessness in Canada and the United States
 Magnitude and persistence of the Great Recession differed significantly
between the two countries
 US: 18-month recession: Dec 2007 to June 2009
Canada: 7-month recession: Nov 2008 to May 2009
 Significant increase in long-term unemployment (LTU) for both countries

Fraction of unemployed individuals with durations exceeding 26 weeks

 Labor force dynamics also show that the magnitude of the Great
Recession was more severe in the US (E-to-U rate and U-to-E rate)
 Lower U-to-E rate =>
higher probability of
staying in the U state
=> long-term
unemployment

 Looking at transition
dynamics is
important!
Duration of joblessness is strongly associated with lower job finding rates
=> Could consider policies that target individuals who experience long-term
joblessness (to help them get out of the joblessness state!)
The longer a worker has been jobless, the more likely they are to leave the labor
force (in net terms) <= likely to be discouraged workers
 Unemployment definition and measures
 Canadian experience: history of events
 Hidden unemployment: timing, causes, and
consequences
 Labour market stock and flows followed by
statistics
 Incidence and duration of unemployment plus
research findings
 Unemployment rates as a summary statistic