Monday, January 7, 2013

Canada vs US Unemployment (in Charts)

Monthly job numbers for the US and Canada were released a few days ago. I get excited for the first Friday to see where the economy stands. December treated both countries well despite any fiscal cliff worries (if the US drove off the cliff into recession, it was going to take Canada with it). The US added 155,000 jobs whereas Canada added 40,000. The unemployment rate in the US stayed steady at 7.8 percent whereas Canada's dropped unexpectedly to 7.1 percent. Post-recession lows for both countries. Labor force participation rates in both countries were unchanged.

Yet these numbers are not exactly comparable. The Unemployment rate is much lower in Canada. The country is doing a lot better than the story that the official numbers tell. 

Here is the basic formula: 

Unemployment rate = Number searching for work / (Number Employed + Number searching for work) 

The difference between the two countries is the definition of searching for work. In the United States only active measures are included. In Canada, both active or passive measures are counted. For instance: if I flipped through the wanted ads in the newspaper, then I would be counted in Canada as searching for work,  but not in the United States. If I applied for a job that I found in the wanted ads, then both countries would count me. 

Passive search methods have rise as the duration of unemployment increases. People stop looking because they believe they can't find a job. The difference between the US and Canadian labor force participation rate is a good approximation of the percentage of people who are too discouraged to look for work. Thus you end up with this chart below:

Labour Force Participation Rate. For details, see the previous paragraph.
Labor force participation =  (Number Employed + Number searching for work) / Population*

Canada has a higher Labor force participation rate solely because of different methodologies. There is nothing structural or innate about Canadians that make them "hard-working" than their American counterparts (or vice versa).

*over 14 years of age in Canada and 15 years of age in the United States

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