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Introduction

This chapter addresses the behaviour of unemployment and labour force participation in Canada and other developed economies over the past several decades. It thus complements the survey of wages and other measures of job quality in the preceding chapter. While the primary focus will be a review of trends in unemployment, it is also appropriate to include some discussion of the behaviour of labour force participation over this period. This will turn out to be particularly important for Canada since changing participation rates have meant that trends in the unemployment rate (the number of unemployed persons as a proportion of the labour force) have not been matched by parallel trends in the employment rate (employment as a proportion of the population).

Before proceeding, it is important to note two overarching points. First, while the definition of employment is relatively clear cut, the definition of unemployment is not. Although reporting of job search within some defined period and similar requirements (e.g., availability for work, knowledge of a future job start date) are common in developed countries, these practical definitions are not implemented in exactly the same way in different economies. Also, even within Canada, such definitions and the surveys on which the measurement is based have changed through time. More generally, there are inevitably questions about exactly where a line should be drawn (if at all) between the polar extremes of active searchers and persons withdrawn from the labour force who would be most unlikely to take any (reasonable) job offer.

Second, as the definition of unemployment is inevitably somewhat blurred, so is the meaning that one attaches to a given level of unemployment. Traditionally, unemployment is seen as a waste of scarce resources, imposing both a cost on society as a whole as well as a cost on the individual concerned. While this view clearly contains much validity, there is no unambiguous way to assess such costs. Frictions in the labour market may have to translate into unemployment as workers and job are matched in a process that takes real time, SO perhaps the traditional view should apply to unemployment beyond this level associated with turnover. Certainly, reallocation of labour could not occur with no frictional unemployment. Thus, the interpretation placed upon a given level of unemployment may depend on an appropriate assessment of the turnover, or natural, rate of unemployment. And it is likely that such rates differ in any country through time and internationally in a given time period. Furthermore, information on the overall level of unemployment summarizes information on the incidence and the duration of unemployment, components of the overall level that may have quite different consequences for individual and societal welfare. Finally, as with measures of wages and job quality, a potentially important issue in assessing welfare implications will be the distribution of unemployment experience across individuals in the population, although this is something on which there is currently relatively scant evidence.

Unemployment in Canada and the U.S.: Recent Trends

The Canadian unemployment rate increased dramatically in the 1980s and the 1990s both relative to its own past performance in the post Second World War era and relative to the U.S. unemployment rate. National 10 year averages have risen continuously from around 4 percent in the 1950s and 5 percent in the 1960s to 6.7 percent in the 1970s and 9.5 percent by the 1980s. In the 1990s the (seasonally adjusted) unemployment rate rose above 10 percent early in 1991 and stayed stubbornly in double digits until almost the close of 1994. Since then, the unemployment rate has been very stable around 9.5 percent, accompanied by a failure of the strong employment growth (of 261,000) experienced in 1994 to be continued in 1995; by November 1995, overall employment was only up 34,000 over the 1994 year-end figure, for example. These most recent employment figures have failed to keep pace with growth in the working age population (roughly a 1.7 percent annual growth rate in recent years) , so that the Canadian employment/population ratio has declined in the past year.

Compared to the U.S. economy, which has also experienced some worsening in the performance of its labour market over this broad time period, the Canadian economy experienced an unemployment rate that averaged two percentage points higher than the corresponding U.S. figure during the 1980s, with the gap reaching almost four percentage points in 1984. More recently, performance in the 1990s has lagged behind the U.S. economy significantly, with the unemployment rate gap being consistently around four percentage points. Significantly, whereas the unemployment gap of the 1980s was almost entirely a result of differences in the division of the non-employment labour market states in Canada and the U.S., the gap of the 1990s has also reflected a failure of Canada to recover the employment rate from the pre-recession years. The Canadian employment rate (seasonally adjusted) was 58.4 percent in November 1994, down from around 62.5 percent in 1989 and 1990. In contrast, the U.S. employment rate reached a peak of 63.3 percent in March 1994 that exceeded its 1989 and 1990 levels.

In terms of regional and other demographic subgroups, there are a number of highlights to report. The distribution of Canadian unemployment worsened regionally over the past 20-30 years, with Eastern Canadian experience being the most striking in the periods 1974-80 and throughout much of the 1980s (Gera, 1991, p.7). However, the West also experienced a substantial rise in unemployment through the 1980s. Overall, Cohen (1991) reports that the 18 percent rise in unemployment in the period 1980-89 was made up of a 3 percent fall in unemployment in Ontario and Quebec and a 60 percent rise in unemployment elsewhere. More recently, Ontario's average unemployment experience has moved much closer to that on Canada as a whole; in 1993, for instance, Ontario's unemployment rate of 10.6 percent was only slightly below the national figure of 11.3 percent. Evidence in 1994 and 1995 confirms this gap of less than a full percentage point.

When broken down by age, the trend through the 1980s was for youth unemployment to comprise a declining proportion of total unemployment (Cohen, 1991), partly due to a decline in unemployment incidence among youth, but also due to the falling cohort size as the baby boom cohorts ended and to changing patterns of labour force participation. In recent years, youth unemployment rose sharply in 1990-92, reaching levels over 18 percent, with a modest decline to around 15 percent towards the end of 1994, a decline that has recently been reversed.

By sex, women's unemployment rates were typically higher than those for men in the 1970s and early 1980s, although the 1982-84 period was harder on male unemployment and the gap, which had been almost two percentage points in the earlier period, closed almost completely by 1985. In the 1990s male unemployment rates were consistently higher than those for women, the difference being between one and two percentage points in 1991 and 1992, declining to about half a percentage point (9.8 for men, 9.2 for women) in 1995 January-November 1995 figures).

These aggregate unemployment figures are, as noted above, composed of both unemployment incidence and duration. In the LFS, information is collected on the average duration of unemployment (of those currently unemployed); note that this measure is of an interrupted duration, rather than of the length of a completed spell. Reviewing the past 20 years, this measure stood around 15 weeks in 1977-81, rose in 1982 and 1983 to peak at 22 weeks, steadily declined over the rest of the 1980s to reach 17 weeks in 1990, and then rose again in the 1990-92 recession to reach over 23 weeks in 1992. Corak (1993c) has also developed a measure of the average completed duration of unemployment for a group of individuals beginning their spell of unemployment in the same period; this avoids some of the problems associated with using the interrupted spell variable. Using Corak's measure, the average completed durations were actually very similar in 1983 (19.5 weeks) and 1992 (19.6 weeks), even though the overall unemployment rate was higher in 1983. However, he found that in the 1990s, the exit rate from unemployment was higher at short durations (up to three months) and lower for the long-term unemployed, leading to a "polarization" of unemployment experiences that may contribute to a greater persistence of unemployment even in the event of economic recovery. Recent evidence corroborates these findings. Average (interrupted) duration rose to 25.7 weeks in 1994 (Perspectives, Spring 1995 supplement, p.8), a huge increase from 16.9 weeks in 1990, and the proportion of the unemployed made up by the long-term (1 year plus) unemployed rose from 6 percent in 1990 to 15 percent in 1994.

With regard to the definition of unemployment, and the behaviour of potential alternative definitions, Devereaux (1992) tracks the properties of nine measures (Rl-R9) that can be constructed from the information in the monthly Labour Force Survey. In the 1990-92 period, most of these measures moved in tandem with the official unemployment rate (R5), some being higher and some being lower on average. The measures that reflect long term' unemployment (Rl, unemployed 14 or more weeks), the part-time labour force (R9) and an unemployment rate based on hours (R8) worsened in the 1990-92 recession more than the official rate. A measure of unemployment broadened to include discouraged workers (R7) behaved very similarly to the official rate while the unemployment rate for heads of families with children (R2) did somewhat better than the official rate.

Patterns of labour force participation (LFP) in Canada over the past two decades can be broken down into a number of distinct time periods. First, there was a period of trend increase in labour force participation overall until the deep recession hit in the early 1980s with the rate rising from below 62 percent in 1976 to nearly 66 percent by 1981. The labour force participation rate then declined somewhat in the recession, although in fact this decline was only about one percentage point and was relatively short-lived. The rate continued its pre-recession trend increase in 1983 and peaked at 67.8 percent at the start of 1990. Since then, Canadian labour force participation has exhibited a steady decline, reaching 64.4 percent by November 1994.

These aggregate trends mask separate patterns for labour force participation by sex. For men, the long-term pattern has been one of gradual decline in labour force participation; in 1953, 82.9 percent of men were in the labour force, a figure that had fallen to 73.4 percent forty years on, primarily as a consequence of early retirement. For women, in contrast, the period since 1953 has seen a more than doubling of the rate of labour force participation (from 23 percent in 1953 to 57 percent in 1993, e.g.), However, this strong upward trend for women appears to have ended in 1991, driven largely by clear declines in the rate of labour force participation for Young women in the 15-24 age range and by some downward drift even for adult women in the 25-34 age range; in recent years, older adult women have not experienced such a decline in labour force participation.

This difference among women by age group is mirrored by overall age group differences in the rate of labour force participation. Youths (aged 15-24) suffered a larger decline in employment rates in the 1990-92 recession than in the 1981-82 recession and participation rates have fallen as a consequence. By November 1994, the youth participation rate was 61.2 percent, a 20 year low.

Relative to the U.S., participation rates overall were relatively similar towards the end of the 1970s but diverged thereafter. Throughout the 1980s the Canadian rate of labour force participation was higher than that in the U.S., typically by a little more than one percentage point. However, around the end of the decade when the Canadian rate peaked and then began to decline quite sharply, the U.S. rate of labour force participation only dipped slightly during the recession of the early 1990s and then slowly recovered from about 1992 onwards. This produced a reversal in the ranking on the two participation rates, with the U.S. rate now clearly higher, accompanied by a large difference in the relative employment/population rates.

Other International Evidence on Trends in Unemployment

Although the contrast between the overall unemployment experiences of Canada and the U.S. is a large one (especially given other similarities in the two economies) , so there is naturally a focus on explaining the sources of this particular difference, an alternative perspective is provided by consideration of the unemployment experiences of other developed economies. In a wide ranging and comprehensive study (OECD 1994), the OECD provides information on unemployment in the OECD as a whole (including eastern Germany from 1991), as well as on individual member nations. Overall, OECD unemployment averaged under 10M throughout the 1950s and 1960s, but tripled between 1972 and 1982, with particular upwards jumps in the immediate aftermaths of the two major oil price shocks in 1974 and 1979. Recently, the figure has gone even higher, with the recovery in the 1982-90 period being more than erased by a peak of 35M in the early 1990s higher than the 30M reached at the previous major cyclical peak.

Across various natural groupings of national economies, the picture naturally departs somewhat from this average (OECD 1994, Chart 1.12, p.35). The European Community had a small trend decline in unemployment rates (reaching rates of 2-3 percent) until the mid-1960s followed by a gradual rise from about 1970 onwards. The unemployment rate, starting around 6 percent, rose sharply starting around 1980, a little after the second oil price shock, and continued to rise and then plateau at the high level of over 10 percent until 198687. Then followed a small decline to under 9 percent by 1990, with a rebound into double digits by the mid-1990s.

In contrast, EFTA (Finland, Norway and Sweden) had only modest unemployment rates through most of this period, with rates usually staying below 4 percent until around 1991. Thereafter, the Nordic economies have undergone a large change in their experience, reaching rates of nearly 8 percent. Japan has also had historically low rates of unemployment, often between 2 and 3 percent, and, unlike the EFTA economies, these rates barely rose in the 1990s.

In terms of trends in labour force participation, a common theme has been the decline in male participation rates and the rise in female participation rates across many OECD economies. The decline in male labour force participation since 1960 has been gradual but consistent in almost every member economy, with rates from 90 to 97 percent in 1960 falling to the 80 to 90 percent range in the early 1990s. The European Community is now at the low end of the scale of OECD experience, with male labour force participation below 80 percent. Across most economies, this decline for men has been particularly concentrated among individuals with low skill levels. The growth in female labour force participation, which has been strongest in North America, has been seen in more moderated form in Europe and, since the end of the 1970s, in Japan. Closely correlated with trends in service sector employment, the rise in female labour force participation has offset the drop in male labour force participation in many but not all economies. In North America, and especially in the U.S., the aggregate rate of labour force participation has risen by close to ten percentage points from 1960 to 1990, a pattern also seen in EFTA, Australia and (recently) Japan. However, Europe has experienced a stable or falling aggregate rate of labour force participation in the 1960-90 period and, with labour force participation around 67 percent, stands 6 to 10 percentage points below the rates of labour force participation in other OECD economies.