5 MONITORING

JOBS AND
INFLATION
After studying this chapter, you will be able to:
 Explain why unemployment is a problem and
how we measure the unemployment rate and
other labour market indicators
 Explain why unemployment occurs and why it
is present even at full employment
 Explain why inflation is a problem and how we
measure the inflation rate
 Employment and Unemployment

What kind of job market will you enter when you graduate?
The class of 2020 had a tough time:
In May 2020, the third month into the COVID-19
pandemic, 2.7 million Canadians wanted a job but couldn’t
find one. Many more had given up searching or had
settled for a part-time job.
The Canadian economy creates lots of jobs: even in the
recession of 2009, 16.6 million Canadians had jobs.
But in recent years, the population has grown faster than
the growth of jobs, so unemployment is a persistent
problem.
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 Employment and Unemployment

Why Unemployment Is a Problem

Unemployment results in
 Lost incomes and production
 Lost human capital
The loss of income is devastating for those who bear it.
Unemployment benefits create a safety net but don’t fully
replace lost wages, and not everyone receives benefits.
Prolonged unemployment permanently damages a
person’s job prospects by destroying human capital.

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 Employment and Unemployment

Labour Force Survey

Every month, Statistics Canada conducts a Labour Force
Survey in which it asks 54,000 households.
The population is divided into two groups:
1. The working-age population—the total number of
people aged 15 years and over
2. People too young to work (under 15 years of age) or
retired

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 Employment and Unemployment

The working-age population is divided into two groups:

1. People in the labour force
2. People not in the labour force
The labour force is the sum of employed and unemployed
workers.

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 Employment and Unemployment

To be counted as unemployed, a person must be in one of

the following three categories:
1. On temporary layoff with an expectation of recall
2. Without work but has made specific efforts to find a job
within the previous four weeks
3. Has a new job to start within four weeks

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 Employment and Unemployment

Figure 5.1 shows the

labour force categories.
In May 2020:
Population: 37.97 million
Working-age population:
31.11 million
Labour force: 19.29 million
Employment: 16.63 million
Unemployment: 2.66 million

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 Employment and Unemployment

Full-time employment:
16.63 million
Part time: 2.58 million
Voluntary part time:
1.93 million
Involuntary part time:
0.65 million

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 Jobs and Home Production

The technical definition involves spending time

working for gain or seeking work for gain.
In the United States, this usually equates to work
outside the home.
Are women who are unpaid family workers on farms
counted in the labour force?
Are they counted if they don’t work outside the
home, but cook, make and wash clothing, and
otherwise maintain the household for a family?

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 Employment and Unemployment

Four Labour Market Indicators

 The unemployment rate
 Involuntary part-time rate
 The labour force participation rate
 The employment rate

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 Employment and Unemployment

The Unemployment Rate

The unemployment rate is the percentage of the labour
force that is unemployed.
The unemployment rate is
(Number of people unemployed ÷ labour force)  100.
In May 2020, the labour force was 16.63 million and
2.66 million were unemployed, so the unemployment rate
was 13.8 percent.
The unemployment rate increases in a recession and
reaches its peak value after the recession ends.

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 Employment and Unemployment

Figure 5.2 shows the unemployment rate: 1960–2020.

The unemployment rate increases in a recession.

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 Employment and Unemployment

The Involuntary Part-Time Rate

The involuntary part-time rate is the percentage of the
labour force who work part time but want full-time jobs.
The involuntary part-time rate is
(Number of involuntary part-time workers ÷ Labour force)
 100.
In May 2020, there were 654,800 involuntary part-time
workers and a labour force of 19.29 million.
The involuntary part-time rate was 3.4 percent.

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 Employment and Unemployment

The Labour Force Participation Rate

The labour force participation rate is the percentage of
the working-age population who are members of the
labour force.
The labour force participation rate is
(Labour force ÷ Working-age population)  100.
In May 2020, the labour force was 19.29 million and the
working-age population was 31.11 million.
The labour force participation rate was 62.00 percent.

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 Employment and Unemployment

The Employment Rate

The employment rate is the percentage of the working-
age population who have jobs.
The employment rate is
(Employment ÷ Working-age population)  100.
In May 2020, 16.63 million were employed and the
working-age population was 31.11 million.
The employment rate was 53.5 percent.

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 Employment and Unemployment
Figure 5.3 shows the labour force participation rate and
employment rate.
Both increased rapidly before 1990 and fluctuate with the
business cycle.

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 Employment and Unemployment

Other Definitions of Unemployment

The purpose of the unemployment rate is to measure the
underutilization of labour resources.
Statistics Canada believes that the unemployment rate
gives a correct measure.
But the official measure is an imperfect measure because
it excludes
 Discouraged searchers
 Long-term future starts
 Involuntary part-timers
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 Employment and Unemployment

Discouraged Searchers
A discouraged searcher is a person who currently is
neither working nor looking for work but has indicated that
he or she wants and is available for a job and has looked
for work sometime in the recent past but has stopped
looking because of repeated failure.
Long-Term Future Starts
A person with a job to start in more than four weeks is not
counted as unemployed.

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 Employment and Unemployment

Part-Time Workers Who Want Full-Time Jobs

Part-time workers who want full-time jobs and can’t find
them as not counted as unemployed.

Most Costly Unemployment

All unemployment is costly, but the most costly is long-
term unemployment that results from job loss.

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 Employment and Unemployment

Alternative Measures of Unemployment

Statistics Canada reports eight alternative measures of the
unemployment rate: three narrower than the official
measure and four broader ones.
The narrower measures, R-1 and R-2, focus on the
personal cost of unemployment.
R-4 is the official unemployment rate; R-3 is comparable to
the U.S. rate.
The broader measures, R-4, R-5, and R-6, focus on
assessing the full amount of underemployed labour
resources.
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 Employment and Unemployment

Figure 5.4 shows eight

alternative measures.
R-1: Long-term unemployed
(15 or more weeks)
R-2: Short-term unemployed
R-3: The unemployment
rate comparable to
the U.S. rate
R-4: Canada’s official
unemployment rate

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 Employment and Unemployment

Broader measures are

R-5: R-4 + Discouraged
searchers
R-6: R-5 + Long-term
future starts
R-7: R-6 + Involuntary
part-timers
R-8: Total underemployment
All measures increase
together in recession.

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 Unemployment and Full Employment

Unemployment can be classified into three types:

 Frictional unemployment
 Structural unemployment
 Cyclical unemployment

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 Unemployment and Full Employment

Frictional Unemployment
Frictional unemployment is unemployment that arises
from normal labour market turnover.
The creation and destruction of jobs requires that
unemployed workers search for new jobs (search and
match process).
Increases in the number of people entering and reentering
the labour force and increases in unemployment benefits
raise frictional unemployment.
Frictional unemployment is a permanent and healthy
phenomenon of a growing economy.
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 Unemployment and Full Employment

Structural Unemployment
Structural unemployment is unemployment created by
changes in technology and foreign competition that
change the skills needed to perform jobs or the locations
of jobs.
Structural unemployment lasts longer than frictional
unemployment.

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 Unemployment and Full Employment

Cyclical Unemployment
Cyclical unemployment is the higher-than-normal
unemployment at a business cycle trough and lower than
normal unemployment at a business cycle peak.
A worker laid off because the economy is in a recession
and is then rehired when the expansion begins
experiences cycle unemployment.

What do you think: Is there a relationship between

cyclical unemployment and the growth rate of full-time
study enrolments?
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 Identifying the type of unemployment

Do you know anyone in your family or friend

who lost his or her job?

Which type of unemployment it creates?

- Frictional
- Structural
- Cyclical

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 Unemployment and Full Employment

“Natural” Unemployment
Natural unemployment is the unemployment that arises
from frictions and structural change when there is no
cyclical unemployment.
Natural unemployment is all frictional and structural
unemployment.
The natural unemployment rate is natural unemployment
as a percentage of labour force.

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 Unemployment and Full Employment

Full employment is defined as the situation in which the

unemployment rate equals the natural unemployment rate.
When the economy is at full employment, there is no
cyclical unemployment or, equivalently, all unemployment
is frictional and structural.

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 Unemployment and Full Employment

The natural unemployment rate (persistent unemployment)

changes over time and is influenced by many factors.
Key factors are
 The age distribution of the population  larger labour
force searching for a job  raises the NU
 The scale of structural change  a technological upheaval
 the old ways are swept aside  raises the NU
 The real wage rate  a high minimum wage rate  more
people want job than firms want to hire  higher NU
 Unemployment benefits  lowers the opportunity cost of
job search  raises the NU
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 Unemployment and Full Employment

Real GDP and Unemployment Over the Cycle

Potential GDP is the quantity of real GDP produced at full
employment.
Potential GDP corresponds to the capacity of the economy
to produce output on a sustained basis.
Real GDP minus potential GDP is the output gap.
Over the business cycle, the output gap fluctuates, and the
unemployment rate fluctuates around the natural
unemployment rate.

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 Unemployment and Full Employment

Figure 5.5 shows the output

gap and …
the fluctuations of
unemployment around the
natural rate.
When the output gap is
negative, unemployment
exceeds the natural
unemployment rate.
(Canada’s NUR: 7%)

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 Apply the Concept 1

How can the unemployment rate be less than

the natural rate?

(think in terms of frictional and structural

unemployment)

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 Apply the Concept 2

The natural unemployment rate is the

unemployment rate when the economy is at full
employment.
The unemployment included in the natural
unemployment rate is comprised of frictional and
structural unemployment.

Two controversies around this concept:

1- Measuring frictional and structural
unemployment
2- The issue of whether discouraged workers
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 Jobs in a Pandemic

A surge in temporary lay offs doubled the number of

unemployed Canadians from Feb to Apr
Lower-wage workers in retail, restaurants, and hotels were
the hardest hit during the shutdown
As public health restrictions eased in May, Canada added
290,000 jobs
Men gained more jobs than women, and lower-wage
workers got fewer jobs

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 Jobs in a Pandemic

The May unemployment rate was 13.7%, higher than the

previous 192 record of 13.1%
A rise in the number of people who wanted a job but
weren’t actively looking for one and not counted as
unemployed would have taken the unemployment rate to
19.6%
Women, low-paid workers, and racialized workers
continue to struggle disproportionately.

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Why did women and teenagers take the biggest hit?

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