Last evening at an early Christmas party, I was assailed by a friend with a slew of statistics pointing out just how bad the current situation is. His most impassioned focus was on the rising unemployment rate and its ominous implications. We were, he said, headed for cataclysm.
His angst had emerged from a series of stories in the Globe and Mail and other national media last week claiming that the rise in unemployment was the biggest in 34 years. I tried to point out to him that the authors of those stories were evidently arithmetically challenged in that they completely ignored the total level of employment and therefore misrepresenting the situation. Yes, but so many people lost their jobs he said, we are headed for a depression.
I was prepared for the Globe to get it wrong but then I received my National Post for Saturday and there it was all over the front page...more nonsense.
Since the current difficulties are in part if not largely psychological in nature, we are now particularly dependent on sensible media coverage. We are not getting it. Here is what the news stories should be reporting.
First, a reminder: While being unemployed is of course catastrophic for any single individual losing his or her job, for an economy and as an indicator of the health of the economy over time, the number of unemployed people doesn't measure anything meaningful. So, for example, in 2007 there were about one million unemployed in Canada and about seven million unemployed in the United States. In each case, the economies were booming, real income levels per person were at an all time high and more importantly, the percentage of the labour force unemployed, called the unemployment rate, was close to all time lows.
The real measure of the state of the labour market and the economy is the unemployment rate adjusted for a number of factors: For the fact that some government programs, like Employment Insurance, actually encourage people who become unemployed to take their time in finding their next job so as to ensure that they are picking the best job they can get and not just the next job that comes along; for the fact that some unemployment is related to the seasonal nature of the industries in which people work and, most importantly, for the fact that some industries -- like automobile production -- are in the process of a needed downsizing leading to temporary unemployment whatever the rest of the economy is doing.
I don't have the space here to make all these adjustments so I will use the actual unemployment rate for the reality checks. The unemployment rate is the number of people unemployed divided by the number of people in the total labour force -- that is the percentage of people looking for a job who cannot find one.
Reality Check No. 1: What is a normal unemployment rate in Canada looking at the last 48 years? Answer: 7.5%. How about the last 36 years, the period during which we have had the more generous unemployment insurance program that exists today? Answer, 8.3%. Where is it at the moment? Less than 6.3%. So, in order to get back to what has been the normal situation -- not overheated by energy investment in the west, super liquidity pumping up housing markets across the country and Olympic spending in B. C. -- the number of unemployed has to go up by about 350,000 to get back up to what has been the normal level since our "modern" pogey system was installed. Why 350,000? That roughly corresponds to the two percentage points of the labour force below the average unemployment rate that we are at the moment.
Reality Check No. 2: What have been the worst employment experiences in the past 48 years?
The nearby chart shows how Canada and the United States have fared over the same time interval. It also shows the level to which the Canadian unemployment rate rose during the Great Depression, as a sobering reminder of just how comparatively well off we have been, even when the unemployment rate soared to 12% in 1983 and 11.4% in 1993.
As to what might be expected in a "normal" slump without any pretensions to a Depression, in the 1980s and 1990s recessions, unemployment rates shot up rather quickly in each case. In the 1982 recession, the rate went from 7.6% to 12% over 24 months, a rise of 4.4 percentage points. Such a rise from our present circumstances would produce a rate of 10.7%, a level below both the 1980s and 1990s recessions.
The United States, which has already been in recession for a year, has had an increase of 1.1 percentage points in its unemployment rate, comparing the average for 2008 to the average for 2007. And, while that is expected to rise even further, the fact is that the average rate of unemployment during 2008 was below the long-term U. S. average of 5.8%. Neither was there anything unusual about an increase of as much as 1.1 percentage points in the U. S. unemployment rate. It happened in 1961, 1970, 1975, 1980, 1982, 1991, 2002 and 2008.
As for those who believe that this time its different because the whole world is going into recession, have a look at the international statistics on the U. S. Bureau of Labor Statistics Web site ( www.bls.gov). Fact is that unemployment is usually international in scope when the economy of the United States and Canada slide because we live in a globally integrated economy.
While there may be some rough water ahead, at the moment there is no evidence of even an average slump, let alone a major one. Current job losses, in proportion to the size of the labour force, are miniscule compared to the sort we have lived through in the recent past. Analysts in the media need to get a grip on themselves and stop spreading idle gossip about how the economy is performing compared to the past. That gossip feeds the fear people already feel and has the possibility of creating a much deeper recession than necessary or likely given the background economics.