(per cent)
15-24
Men
25-44 45+ Total
1975 12.5 4.0 3.9 6.2
1976-- 13.2 4.6 3.7 6.3
1977 14.9 5.2 4.4 7.3
1978 15.0 5.5 4.7 7.5
1979 13.2 4.9 4.0 6.6
1980 13.7 5.2 4.0 6.9
1981 14.1 5.3 4.1 7.0
1982 21.1 9.1 6.6 11.1
1983 22.4 10.3 7.4 12.1
1984 19.4 9.9 7.3 11.2
1985 18.2 8.9 7.1 10.3
Women
15-24 25-44 45+ Total
1975 11.4 7.1 5.4 8.1
1976 12.1 7.6 5.0 8.4
1977 13.8 8.2 5.9 9.4
1978 13.8 8.7 5.9 9.6
1979 12.7 7.8 5.4 8.8
1980 12.6 7.0 5.5 8.4
1981 12.3 7.5 4.9 8.3
1982 16.1 9.8 6.9 10.9
1983 17.0 10.5 7.6 11.6
1984 16.2 10.6 7.8 11.4
1985 14.6 10.3 7.5 10.7
Source: Statistics Canada, Historical Labour Force Statistics February 1985, cat. 71-201 and The Labour Force,
December 1985, cat. 71-001.
Table 3
UNEMPLOYMENT RATES BY INDUSTRY IN CANADA
ALL CLASSES OF WORKERS
(per cent)
1975 1981 1982 1983 1984 1985
Agriculture 2.8 4.5 6.4 7.2 6.9 7.1
Fish. & Trap. 11.1 10.4 13.7 14.5 17.1
Forestry 19.4 19.9 28.7 25.3 24.9 26.9
Mines, Quar. & Oil 5.6 6.1 12.9 13.7 10.9 8.9
Manufacturing 7.4 7.9 13.4 13.0 11.0 10.1
Construction 11.8 12.7 20.5 23.9 22.7 20.0
Trans., Comm.
& Utilities 4.9 5.1 7.5 8.3 7.9 7.2
Trade 5.6 6.5 9.6 10.5 9.9 8.9
Finance, Ins.
& Real Estate 2.9 3.9 5.3 6.0 6.2 6.2
Community, Bus.
& Pers. Services 5.4 6.8 9.2 10.2 9.6 9.6
Public Admin. 4.2 5.4 7.0 7.8 8.3 8.3
All Industries 6.9 7.5 11.0 11.9 10.5 10.5
Source: Statistics Canada, Historical Labour Force Statistics February 1985, cat. 71-201 and The Labour Force,
December 1985, cat. 71-001.
Table 4
UNEMPLOYMENT RATE BY PROVINCE
(per cent)
Nfld.P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C.
1975 14.0 8.0 7.7 9.8 8.1 6.3 4.5 2.9 4.1 8.5 1976 13.3 9.6 9.5 11.0 8.7 6.2 4.7 3.9 4.0 8.6 1977 15.5 9.8 10.6 13.2 10.3 7.0 5.9 4.5 4.5 8.5 1978 16.2 9.8 10.5 12.5 10.9 7.2 6.5 4.9 4.7 8.3 1979 15.1 11.2 10.1 11.1 9.6 6.5 5.3 4.2 3.9 7.6 1980 13.3 10.6 9.7 11.0 9.8 6.8 5.5 4.4 3.7 6.8 1981 13.9 11.2 10.2 11.5 10.3 6.6 5.9 4.7 3.8 6.7 1982 16.8 12.9 13.2 14.0 13.8 9.8 8.5 6.2 7.7 12.1 1983 18.8 12.2 13.2 14.8 13.9 10.4 9.4 7.4 10.8 13.8 1984 20.5 12.8 13.1 14.9 12.8 9.1 8.3 8.0 11.2 14.7 1985 21.3 13.2 13.8 15.2 11.8 8.0 8.1 8.1 10.1 14.2 Source: Statistics Canada, Historical Labour Force Statistics
February 1985, cat. 71-201 and The Labour Force, December 1985, cat. 71-001.
Table 5
AVERAGE DURATION OF UNEMPLOYMENT IN CANADA
BY AGE AND SEX
(weeks)
Both Sexes
15-24 25-44 45+ Total
1976 12.2 14.7 17.3 13.9
1981 13.0 15.9 19.3 15.1
1982 15.4 18.0 20.4 17.3
1983 18.4 23.1 26.7 21.8
1984 16.8 23.0 27.9 21.6
1985 15.8 23.1 29.6 21.6
Source: Statistics Canada, Historical Labour Force Statistics February 1985, cat. 71-201 and The Labour Force,
December 1985, cat. 71-001.
4 GOALS FOR FULL EMPLOYMENT
4.1 Official Statements of Goals for Full Employment
The liLitilaper tandIncome published in 1945 (Department of Reconstruction and Supply (1945)) expressed the Canadian government's commitment to the goal of high employment. Slyecifically, the government stated that:
"The central task of reconstruction...must be to accomplish a smooth orderly transition from the economic conditions of war to those of peace and to maintain a high and stable level of employment and income." (p.1)
While the White Paper did not enunciate a particular numerical goal, it did mention the concept of "full employment."
"In setting as its aim a high and stable level of employment and income, the Government is not selecting a lower target than 'full employment.' Rather the Government is mindful that employment and incomes will be subject to fluctuations in the sphere of international trade, which cannot be wholly and instantaneously offset, and that seasonal fluctuations, resulting from climate and buying habits, are not to be overcome without much patient and resourceful work."(pp.1-2)
Consistent with the optimistic Keynesianism then current, the White Paper focussed on the goal of high employment and made no mention of the goal of price stability.
The first specific quantitative goal for full employment was that proposed by the Economic Council of Canada in its first annual review (1964, p.189). It was for a medium term goal of 3 per cent for the unemployment rate and less than 2 per cent for the average annual rate of price increase. This represented a significant improvement over actual performance during the 1945-63 period and was said to require favourable conditions and wage and price restraint.
The Carter Royal Commission on Taxation (1966) suggested that the rate of unemployment could be reduced to 4 per cent without creating any sustained inflationary pressure, but that rates below 3 per cent were not sustainable. It thus proposed a short-term goal of 3.5 per cent. The Carter Commission was critical of what it regarded to be an over-concern with inflation in the policy stance of the late 1950s and early 1960s.
The deterioration of inflation performance in the 1960s gave rise to increasing concern and in 1968 lead to the establishment of a Price and Incomes Commission. A Special Senate Committee on Growth, Employment and Price Stability was also set up to look into the situation. In 1971, this Committee reported that it was feasible through fiscal, monetary and exchange rate policies to achieve the medium-term goals of maintaining the unemployment rate in the 4 to 4.5 per cent range and of limiting annual incrases in the consumer price index to 2 to 3 per cent.
In a 1970 study the Economic Council (1970) defined the rate of unemployment associated with potential as between 3 and 4 per cent.
The Price and Incomes Commission in its summary report released in 1972 blamed the increase in inflation in the mid-1960s largely on excess demand and attributed the persistence of inflation in spite of the increase in unemployment in 1970 to the lag in the adjustment of inflationary expectations. The Commission estimated that the unemployment rate reached a "danger point" likely to trigger inflationary pressures when it fell below 4.5 to 5 per cent.
In the late 1970s two studies of the economy's potential output were published by the Conference Board, an agency with a semi-official status, which embodied estimates of full employment unemployment rate. The first of these by R. Crozier (1977) calculated potential output using a rate of unemployment of 5 per cent for the 1973 to 1976 period. The second by E.A.
Carmichael (1979) used an unemployment rate of 6.4 per cent in 1978. Carmichael's study suggested that over the 1973 to 1976 period covered by Crozier that the full employment unemployment rate varied between 5.3 and 5.7 per cent. This was significantly above the 5 per cent estimated by Crozier.
While the Economic Council never established a goal for the unemployment rate in the early 1980s, there are comments and observations in its annual reviews which are suggestive. For instance, in Lean Times, the 1982 annual review, it is noted that the then current unemployment rate of 12 per cent is "well above the 6.5 to 7 per cent rate of unemployment thought to be
consistent with a stable rate of wage inflation." (Economic Council, 1982, p.89) In On the Mend, the Twentieth Annual Review, a cyclically-adjusted unemployment rate of 7 per cent is used in calculating a cyclically-adjusted budget balance.
(Economic Council, 1982, p.55)
As the 1970s progressed, there was an increasing degree of realism about what might constitute a viable objective for reducing unemployment. To a large degree, this realism, combined with a reluctance to go on the record with an __unemployment goal that might be construed as indicating a willingness to tolerate high unemployment, inhibited the establishment of official goals for the unemployment rate. The only exception to this was Parliamentary Task Force on Employment Opportunities for the 80s, which in 1981 recommended a full employment goal of a 4 per cent unemployment rate. This was considered to be unrealistic by most knowledgeable observers. However, it is worth noting that even as late as 1983--two academic economists, Diane Bellemare and Lise Poulin-Simon were, in a monograph on full employment, using a full employment unemployment rate of 3.5 per cent to calculate the cost of unemployment to the Canadian economy.
In spite of unemployment never averaging below 5.3 per cent on an annual basis, the 1970s were marked by double-digit inflation. The Macdonald Royal Commission on the Economic Union and Development Prospects for Canada (1985, Vol. 2, p.284), commenting on this trends, estimated that the Non-Accelerating Inflation Rate of Unemployment (NAIRU) rose from the 4 to 5 per cent range in the 1950s and early 1960s, to 6 to 7 per cent in the early 1970s, and to 6.5 to 8 per cent today. The Commission proposed that getting the unemployment rate down to this 6.5 to 8 per cent range should be the medium-term goal of stabilization policy.(p.376) It stressed that expansionary monetary and fiscal policies cannot sustain levels of unemployment below this range over the longer term. Such a permanent reduction in unemployment would require the implementation of structural changes. To accomplish this end the Commission recommended that such policies as freer-trade, labour-market adjustments, and new mechanisms for labour-management relations be adopted.
4.2 Estimates of the Natural Rate Of Unemployment
Since the most reasonable medium-term goal for full employment is currently agreed to be the NAIRU, it is important to have the most reliable estimates of it currently available. These are summarized in table 6 as compiled by Fortin and Newton (1982) and updated to incorporate some new estimates. The increase in
structural unemployment due to such factors as shifts in the demographic composition of the labour force and the changes to Unemployment Insurance are evident. Also except for two recent exceptions, estimates canvassed all fall in the 6 to 7 per cent range. This is lower than the 6.5 to 8 per cent range suggested by the Macdonald Commission. It offers some promise that the rate of unemployment can be reduced to a fairly reasonable level without leading to a resurgence of inflationary pressures.
Hovever, before drawing any firm conclusions, it is useful to take a closer look at some of the studies.
Table 6
ESTIMATES OF THE INCREASE IN THE STRUCTURAL UNEMPLOYMENT FROM THE 1950S TO THE 1970S AND OF THE RECENT
LEVEL OF NAIRU
Increase in Study
Structural Period of Level of Unemployment Increase NAIRU
Date of NAIRU
Freedman (1976) 7.2 1975:4
O'Reilly (1976) 2.1 1960-75
Kierzkowski (1977) 2.1 1962-75 6.5 1975
Reid and Meltz (1979) 3.3 1953-75 Aubrey, Cloutier
and DiMillo (1979) 3.2 1953-77 7.0 1977
Fortin and Phaneuf (1979) 2.1 1957-78 6.6 1978 Grubel and Maki (1979) 2.6 1955-75
Dungan and Wilson (1979) 2.5 1953-77
Riddell (1979) 2.5 1955-78 7.0 1978
Siedule and Newton (1979) 1.7 1961-78 5.5 1978
Gosselin (1980) 3.3 1962-79 6.5 1979
Aubrey (1982) 6 to 6.5 1980
Guindon and Grignon (1981b) 2.7 1962-79 6.6 1979 Riddell and Smith (1982) 1.5 1966-79 6.2 1979
Samson (1985) 6.4 1957-83 11.0 1983
McCallum (1985) 6.6 1984
Marion (1985) 5.5 1963-82 12.0 1982
Source: Update of estimates in Table 9 of preliminary version of Fortin and Newton (1982).
4.2.1 Bank of Canada
Several of the estimates of the NAIRU have been made by economists in the Research Department of the Bank of Canada.
This includes: Freedman (1976); O'Reilly (1976); Kierzkowski (1977) Aubrey, Cloutier and DiMillo (1979); and Aubrey (1982).
Much of this work is surveyed in Merrett (1979).
The approach followed by Freedman (1976) and O'Reilly (1976) was to construct corrected vacancy and unemployment rates by eliminating the effects of changed structural factors from the actual measured rates. This was done by estimating an equation for the unemployment rate as a function of the inverse of the vacancy rate, the change in the inverse of the vacancy rate, the proportion of the labour force employed in the agriculture sector, Unemployment Insurance benefits as a proportion of the average weekly wage, the proportion of the labour force comprised of youths, the proportion of the labour force comprised of adult females, and a weighted measure of the dispersion of the demographic unemployment rates around their average. An adjusted unemployment rate was then calculated using the average of 1965 and 1966 as a base period.
Freedman (1976) used the adjusted unemployment rates and vacancy rates as explanatory variables in estimating various extended Phillips curve wage equations. He then solved the various equations for the NAIRU by setting expected and actual inflation equal and less than the rate of increase of wages by the assumed rate of productivity growth. (Freedman also used Phillips curves expressed solely in terms of prices as an alternative to avoid the necessity of making productivity assumptions, but he regarded these to be less satisfactory.) While only his preferred estimate of the NAIRU of 7.2 per cent in the fourth quarter of 1975 is presented in the table, other estimates, some of which were as high as 10 per cent and were regarded by Freedman as implausible, were presented in his paper.
Kierzkowski (1977) estimated the natural rate starting from the assumption that the actual unemployment rate should equal the natural rate except for random deviations. He estimated an equation that specified the unemployment rate as a function of the proportion of women and of youth in the labour force, some variables representing Unemployment Insurance benefits and coverage, and a cyclical variable. The only variable which turned out to be significant in his final equation was the proportion of women in the labour force. Thus, his estimate of
6.5 per cent for the natural rate depended entirely on the proportion of women in the labour force. With this proportion continuously rising, Kiezkowski's equation has the implausible implication that the natural rate will also continue to rise.
Aubrey, Cloutier and DiMillo (1979) estimated the natural rate by following an approach involving regressing prices on the gap between actual and trended growth and on price expectations as represented by a twelve quarter distributed lag on past price changes. The coefficient on price was constrained to one to yield a vertical long-run Phillips curve. The equation was then solved for the gap that equilibrated actual and expected inflation. The gap was then converted into a natural rate of unemployment using an estimated Okun's law equation relating the the unemployment rate to the gap and other variables that might have caused the relationship between the unemployment rate and the gap to shift. These other variables included: the ratio of average unemployment insurance benefits to the average weekly wage;- participation rates and shares of women and youth in the labour force; a time trend; and dummy variables for periods following revisions to the Unemployment Insurance Act. Of these variables only the Unemployment Insurance dummy variable was significant. Their estimate of the natural rate was 7 per cent in 1977.
Aubrey (1982) provided revised estimates of the natural rate as a by-product of estimating a small wage price system comprising equations for wage changes, price change, unit labour costs, the exchange rate, and export prices. The key wage equation was an extended Phillips curve with wages a function of productivity change, the gap between the actual and adjusted unemployment rates, and a dummy variable for the AIB. The adjusted unemployment rate used was calculated following the methodology developed earlier by Aubrey to incorporate the impact of changes in Unemployment Insurance benefits and regulations. The natural rate emerging from the Aubrey wage-price model was in the 6 to 6.5 per cent range in 1980.
4.2.2 Reid and Meltz (1979)
Reid and Meltz made use of the inverse relationship between the unemployment rate and the vacancy rate to distinguish between changes in deficient demand unemployment (represented by movements along the curve) and changes in non-deficient demand unemployment (represented by shifts in the curve). The sources of shifts in the curve that were considered were major changes in the Unemployment Insurance Act. The effect of changes in the UI Act were measured using two alternative methods. The first
was to use the ratio of average weekly wages to average weekly earnings as an explanatory variable. The second was to include dummy variables for the 1955 and 1971 revisions to the UI Act.
Since the relationship between the unemployment and vacancy rates was assumed to exist in each micro labour market, the macro relationship that was estimated could shift because of increased dispersion of excess demand among labour markets and because of changes in the demographic composition of the labour force.
--- The analysis carried out by Reid and Meltz suggested that the main cause of the upward shift of approximately three percentage points in the unemployment-vacancy relationship in Canada from the mid-1960s to the mid-1970s could be attributed to three factors. First, the continuing shift from agricultural to non-agricultural employment contributed about 0.2 percentage points. Second, the 1971 change in the UI Act contributed about 1.9 percentage points, of which 0.7 percentage points resulted from-the higher benefit-wage ratio and 1.2 percentage points from revisions in the regulations of the Act. Third, demographic changes contributed about 1.2 percentage points. No estimate of the level of the natural rate was provided by Reid and Meltz.
4.2.3 Grubel and Maki (1979)
Grubel and Maki estimated the impact of structural changes on the unemployment rate using data drawn from the old labour force survey covering the period 1950 to 1975. The approach used was to regress the labour force to population ratio (the participation rate) and the employment to population ratio separately on a set of explanatory variables and then to use these equations to calculate the impact of the explanatory variables on the unemployment rate. The explanatory variables used reflect the Unemployment Insurance program, the degree of unionization, minimum wages, and the ratio of GNP to its trend.
A time trend was also included. The results indicated that the UI changes raised the unemployment rate by 0.3 percentage points between the 1962-65 and 1972-75 periods. The degree of unionization increased the unemployment rate by 2.2 percentage points over the same period. They concluded that, if one accepts that the natural rate in 1952-55 was approximately 3 per cent, that the natural rate in 1972-75 was about 5.5 per cent.
4.2.4 Riddell (1979)
Riddell used two different approaches to estimate the natural rate. The first involved estimating equations in which the unemployment rate was specified to be determined by some combination of cyclical and structural factors. The cyclical variables were the deviation of actual from anticipated inflation and the deviation of the real GNP from tend. The Riddell and Smith (1978) measure of inflation expectations was used. The second approach involved estimating an extended Phillips curve wage equation where the rate of change in wages is a function of the unemployment rate and expected wage inflation as well as of variables for structural changes in labour markets. The structural variables tried by Riddell were:
- the 'real' minimum wage rate (the ratio of the minimum wage to average weekly wages);
- a measure of the generosity of the Unemployment Insurance program ;and
- measures of the composition of the labour force.
The UI variables used were:
- the real value of UI benefits;
- the coverage of the UI Act;
- the minimum number of weeks necessary to qualify for benefits;
- the maximum number of weeks for which benefits can be drawn;
- the number of additional weeks of benefits which be drawn for each additional week of employment; and
the degree to which eligibility rules are strictly or leniently interpreted.
The real value of UI benefits was measured in two alternative ways:
- average benefits paid during the period (total benefits divided by the number of claimants); and
- maximum benefits paid.
The unemployment rate variables used were specified to allow for changes in the demographic composition of the labour force.
These variables were:
- the unemployment rate for prime age males;
an unemployment rate standardized for the 1965 composition of the labour force; and
- the overall unemployment rate supplemented by additional variables for the proportion of the labour force under 25 years of age and the fraction of women workers in the labour force.
Two other variables used by Riddell in his analysis were a dummy variable- for the AIB period and the variability of
Riddell's Phillips curve results were extremely week and consequently were not used. For the unemployment equation approach, the preferred equations ( one using the difference between actual and anticipated inflation and the other using the GNP gap) indicated that changes in the minimum wage tended to lower the unemployment rate (a perverse result) and in Unemployment Insurance tended to raise the unemployment rate.
In other equations, the variables for the share of women and young people also had the expected signs.
4.2.5 Seidule and Newton (1979)
Seidule and Newton pursued a different approach in estimating a non-cyclical rate of unemployment, a concept which is closely akin to the natural rate of unemployment. Their methodology involved the calculation of the economy's real output gap, and the required man-hours per unit of real output. The former was then divided by the latter to generate an estimate of the cyclical unemployment. Non-cyclical unemployment was then calculated residually by subtracting cyclical unemployment total unemployment. A problem with this approach, which casts doubt on its reliability, is that it involves a degree of circularity since the output gap used was calculated assuming a certain degree of cyclical unemployment.
While Seidule and Newton stress that their estimate of the non-cyclical unemployment rate is not the same thing as the NAIRU because their estimate of cyclical unemployment may
include some elements of structural and frictional unemployment, they note the remarkable similarity between their own estimate of non-cyclical unemployment rate of 5.5 per cent in 1978 and
include some elements of structural and frictional unemployment, they note the remarkable similarity between their own estimate of non-cyclical unemployment rate of 5.5 per cent in 1978 and