Job creation is not very high on Canada’s list of problems

Posted on February 24, 2015 in Policy Context – Full Comment
February 23, 2015.   Stephen Gordon, National Post

We’re going to hear a lot about job creation over the months leading up to the election. Of course, we’d hear a lot about job creation even if an election wasn’t on the line: When politicians talk about an economic policy, they invariably dwell on its effects on employment. This focus probably makes sense in terms of electoral strategy, but there’s more to economic policy than jobs. And right now, job creation is not very high on our list of problems.

The trend-cycle distinction is useful here. In the short term, month-to-month changes in employment largely consist of statistical noise and are an unreliable basis for making policy. In the medium term — horizons of five years of so — the business cycle drives fluctuations around the long-term trend. Policies that are effective for dealing with recession-induced drop in employment don’t improve long-term trends in job markets — and vice-versa. But as things stand now, job creation isn’t a priority neither in terms of the business cycle nor in terms of the long term.

The business cycle first. Statistics Canada’s estimate for the unemployment rate in January 2015 is 6.6%. This is lower than it’s been in 40 years, with the exception of the pre-crisis period 2006-08. In hindsight — these things are never obvious at the time — those years were exceptional. According to both the Bank of Canada and the IMF, the Canadian economy was operating significantly above capacity during 2006-08: world GDP was booming, and oil prices were in the stratosphere. Using the pre-crisis years as a point of reference is setting the bar pretty high.

But the more important point has to do with demographics. Between 1965 and 1995, the Canadian population increased by about 50%. If employment had grown in proportion to the population, there would been about 10.2 million more people working in 1995. As it happened, actual employment in 1995 was 13.3 million.

Two things happened in the mid-1960s. The first was the arrival of the baby boom generation on the job market. Even as Canada’s population increased by 50% between 1965 and 1995, the number of people between the ages of 15 and 64 increased by 70%. Moreover, the “prime” cohort of those aged 25-54 — the group with the highest labour force participation — increased by 90%. By 1995, an extra 1.9 million jobs were required simply to maintain the employment rates observed in 1965.

Even that wouldn’t have been enough, because the other thing that happened was the increase in female labour force participation rates. This added an additional 1.1 million workers to the workforce by 1995.

The challenge of absorbing three million extra workers into a workforce of ten million explains why policy-makers and voters would be so focused on job creation for so long. But things have changed over the past 20 years, and will change even more drastically in the next 20 years.

Women’s participation rates had not yet plateaued in 1995, but they appear to have done so since then. The young women who entered the workforce in the 1970s have reached retirement age, and the participation rates of younger female cohorts have stabilized. This means that future changes in the size of work force are going to be mainly driven by changes in the age structure of the population.

By 1995, the baby boom generation had been fully incorporated into the workforce, and the much smaller “baby bust” generation — to borrow David Foot’s expression — had entered the job market. The growth rate of the prime 25-54 cohort slowed, and its share of the workforce peaked in 1996. The baby boom started aging out of the prime age workforce more than 10 years ago, and the leading edge is already of retirement age.

The predictions are now being transformed from future scenarios into current facts

None of this is new: demographers and economists have been making these predictions for decades. What is new is that the predictions are now being transformed from future scenarios into current facts. Take, for example, the widely reported story that Statistics Canada recently revised an increase in employment of 185,000 during 2014 to an increase of only 125,000. This was widely viewed as evidence that the labour market had been weaker than we had thought. But this is the wrong way to look at it: estimates for features such as employment rates and unemployment rates remained unchanged. According to both the revised and unrevised data, the unemployment rate fell during 2014. What had changed were the population estimates. According to the old data, 185,000 new jobs would have been required to bring the unemployment rate down. But with the lower, revised population estimates, the same reduction in unemployment rates could be obtained with fewer new jobs.

The number of people between the ages of 15 and 64 is falling in every province east of the Ottawa River; the prime-age population had started falling there years ago. For Canada as a whole, the 15-64 population continues to grow, but only because of the increase in those aged 55-64; the number of people between the ages of 15 and 54 peaked a few months ago.

This changes — or at least, it should change — how we look at the challenges facing the labour market. For example, the problem of youth unemployment is likely to solve itself fairly soon: the 15-24 population is falling at a rate of 3,000 people per month.

It used to make sense to put job creation at the top of the list of policy priorities. But in an economy where there are fewer people of working age, the challenge now will not be to find them a job. It will be to make sure that they have the equipment, technology and skills to generate the most income possible.

National Post

Stephen Gordon is a professor of economics at Laval University.

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