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The Hidden Truth in Unemployment Stats

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

Have you seen the numbers lately? We should be celebrating in the streets! Recent economic performance has driven unemployment rates down to levels that many believed would not be seen for years to come. So why doesn't it feel that way? Is everyone missing the greatest development in the world economy in years, or is there some good reason for deferring the big party?

Decline in the unemployment rate has been no more dramatic than in the US. From late 2008 to mid-2009, the rate nearly doubled, from 5 per cent to just under 10 per cent, with risk scenarios seeing as much as 10.5 per cent. Since then, the unemployment rate has declined remarkably, currently at 6.7 per cent and on a decided downward trend. The speed of decline should have economy-watchers of all kinds and business planners alarmed about impending labour shortages. But they aren’t.

The US isn’t alone. Japan’s pattern is very similar to America’s, only its unemployment rate is now back to pre-crisis levels. At the same time, Canada’s unemployment rate has fallen from its 8.7 per cent peak to 6.9 per cent. From a peak of 8.5 per cent in late 2011, the unemployment rate in the UK fell below the 7 per cent level in January, and seems to be trending downward. Hop across the Channel, and the story grows. Germany’s unemployment marker has tumbled steadily from the mid-crisis high of 8 per cent to just 5.1 per cent in February. France and Italy aren’t as blessed, still struggling with stubbornly high rates. But while its rate remains impossibly high, Spain has turned the corner, and is on the way down. Ireland and Portugal have both seen dramatic U-turns in their data.

Normally, such progress would hail the conclusive return of a new growth cycle, initiating a fresh round of business investments and resurgence in the retail sector. Yet to date, activity is still marked by a hesitant, ‘you-first’ mentality, and policy-makers remain unimpressed by the numbers. There’s very good reason for the hesitation, and it’s buried in the way the stats are calculated. Statistical agencies count as unemployed those who are out of work, but actively looking for a job. Those who aren’t actively looking – usually out of discouragement – are dropped out of the labour force numbers. Economic stagnation has caused the ranks of discouraged workers to soar. This phenomenon is measured in a lesser-known statistic, the labour force participation rate. What’s it saying these days?

Labour force participation in the US has sunk steadily since mid-2008, and its nascent upswing is too recent to be called a trend. Japan’s recent upswing is more impressive, but too volatile to be truly meaningful – and it is still well below pre-crisis levels. Canada’s participation rate remains on a down-trend – there is no sign yet of a rebound. The same numbers are harder to find in Europe, but labour force participation seems better off in the UK and Germany. But in general, Europeans seem less inclined to get discouraged. Long-term unemployment in most countries is still at or close to post-crisis highs, and in not a few cases, is still rising.

What this adds up to is a world where, on the face of it, there is improvement, but labour markets are still very challenged. One twist of the data shows this clearly. If we reset current participation to pre-recession levels, and added in all of those non-participants to the labour force, we could compute an ‘effective’ unemployment rate. For the US, that number jumps to 10.8 per cent. For Japan, it moves up to 5.2 per cent. Canada’s number rises from 6.9 per cent to 8.4 per cent. While the changes aren’t the same for the European numbers, the data for the long-term unemployed tell the same tale.

The bottom line? Key policy-makers have used unemployment rate data as a signal of economic improvement, but casual observers know the underlying story. These data back up that more somber view. It’s going to take a lot more growth to bring improvement. Fortunately, that’s on the way.

© EDC

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