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Unemployment and the New Growth Cycle

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

Looking for a road map that traces the ups and downs of the global economy? The effect on regular people is a good place to start. Unemployment rates in economies everywhere chronicle the fallout of growth gone bad, and are a critical measure of the sustainability of growth cycles. They never tell us in advance, given that they lag the cycle, but they are generally a useful gauge of where an economy is at. So, what are unemployment rates in the world’s top developed economies telling us?

Let’s start with the top economy. A quick look at the US jobless rate and anyone would conclude that the growth cycle is quite mature. In early 2007, at the very peak of growth in the last cycle, the American unemployment rate bottomed out at 4.5 per cent. It wasn’t there for long, but that was an impressive feat, far lower than anyone believed was possible. It zoomed up to 10 per cent in 2009, and since then, has been on a steady downward march. It’s now at a very enviable 5.5 per cent. So, is US growth near its peak? Not nearly. Last time unemployment was this low, participation in the labour market was high. Currently, US labour force participation is close to a cyclical low. What this means is that the crisis pushed a lot of potential workers to the side, and they haven’t returned. If they did, the US unemployment rate would actually be closer to 10 per cent. That doesn’t sound like a mature growth cycle to me – or anyone else.

Is America unique? For all its growth woes, Japan boasts a very low unemployment rate of 3.3 per cent. True, this is exacerbated by the intense aging of its population, but Japan also seems to share a bit of the US problem. Labour force participation fell in the post-crisis period, and has had trouble recovering. As such, Japan’s effective unemployment rate is actually just shy of two full percentage points above the official posted rate.

Well, that’s not a great start; what of Germany? Here, the news is more inspiring. As in the rest of the world, Germany’s unemployment rate rose during the crisis, but the increase was short-lived; a year later, the rate was back to pre-crisis levels, and since then it has tumbled ever lower. It now sits at 4.7 per cent. What sets Germany apart is participation. Its employment-to-population ratio has actually risen steadily since 2004, and although the data is somewhat dated, it stands in contrast to the experience in both Japan and the United States.

Numbers from the UK are also impressive. Post-crisis, its unemployment rate remained stubbornly high for four years. However, it has tumbled since mid-2013, and now boasts a cyclical-low 5.5 per cent, and is still falling. What’s more, economic activity – the UK measure for engagement of the labour force population – is about average, not the flagging rates seen in the US or Japan. Maybe Europe has something that the rest of the world is looking for.

Or maybe it’s just those two. Cross the Channel to France, and the story is not nearly so good. The headline unemployment rate is still double-digit, posting 10.1 per cent in the first quarter. Furthermore, forecasters don’t expect this to change much. The average forecast for 2015 is 10 per cent, with only a slight decline to 9.8 per cent forecast for 2016. It’s just as ugly in Italy. Its unemployment rate is just cresting, and is forecast to be above 12 per cent this year and next. This is partly due to modestly higher participation, so in fairness, workers do seem to be somewhat hopeful. But clearly, the economy has a long way to go. The same is true for Spain, where the rate remains just a tad below 20 per cent.

Canada’s experience is more like America’s. Our unemployment rate has dipped to 6.8 per cent, impressive for this point in the cycle. But participation isn’t really budging from cyclical lows, and with domestic weakness and plunging oil prices, it’s hard to imagine what will break the logjam in the near term.

The bottom line? The economy’s road map is complicated by the varied paths of unemployment in the world’s top economies. One message is clear, though – for the most part, there is still lots of room to grow, and given recent experience, that’s a good thing.


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