Miles Corak is a professor of economics with the Graduate School of Public and International Affairs at the University of Ottawa. The full version of this post is available at milescorak.com
At 8.1 per cent the unemployment rate in the United States is about one percentage point above the 7.2 per cent currently reported for Canada, but this gap would be almost two percentage points if the Canadian rate was measured in the same way as the American.
This revealing picture (attached graphic) from the recent Canadian federal government Budget document paints a more accurate portrait by using unemployment rates defined in a similar way across the two countries.
The left panel shows the evolution of employment compared to its level in 2006. The striking fall and incomplete recovery in the U.S. is all the more evident by the comparison to Canada. These numbers can be confidently compared because they are defined and measured in the same way on both sides of the border (though it would be more appropriate to express them as a percentage of the working age population as I suggest in this post).
The right panel shows that the gap between the American and Canadian unemployment rates is much bigger when a comparable Canadian rate is used in place of the headline measure regularly reported by Statistics Canada.
While the statistical agencies in both countries use the same methods to describe the jobs market, the gap between the unemployment rates rests on a couple of subtle differences in the criteria used to classify someone as unemployed.
The Bureau of Labour Statistics and Statistics Canada base their calculations on monthly surveys that use a sample of between 50,000 and 60,000 households to represent the working age population in each country, those 15 years of age and older.
In the United States, 15-year-olds are not included in the calculations but this does not play a large role in determining the gap in unemployment rates.
The surveys ask a series of very similar questions in order to classify respondents as either being Employed or Unemployed: it is the way in which these questions are asked – particularly the distinction between “active” and “passive” job search methods – that drives an important part of the gap.
To be considered “Unemployed” a survey respondent must not have done any work for pay during a particular week of the survey month, must be available for work, and – most crucially – must have done something to find a job during the last four weeks.
The U.S. makes a distinction between job search activities that involve “active” measures (activities that on their own could lead to a job offer), as opposed to “passive” measures (activities that require some additional effort to obtain an actual job offer).
Placing or answering a job ad, visiting employment agencies or businesses, making job inquiries and sending applications as well as attending interviews are all examples of active search methods. Asking family and friends for jobs or leads is also considered an active measure.
Passive measures are more along the lines of information gathering, like simply looking at job ads in the newspaper or on the internet.
In the United States only active measures lead to someone being designated as “unemployed”; in Canada either type of activity will do the trick.
The crux of the matter is that flipping through the want-ads in a newspaper gets you classified as unemployed in Canada, but not in the United States.
A nicely written paper by Constance Sorrentino, an analyst with the Bureau of Labour Statistics, notes that a rise in the use of passive job search methods in Canada is important as an explanation for the difference.
Passive search methods have been on the rise because as the duration of unemployment spells increases, the longer-term unemployed become more discouraged and therefore more likely to uniquely use them as they step closer and closer to giving up looking altogether.
Writing in 2000, Ms. Sorrentino claims that if the Canadian unemployment rate were adjusted to U.S. concepts it would be reduced by 1 percentage point.
As the picture from the Budget makes clear, this remains the case now.
The Canadian unemployment rate would be lower if only those actively looking for a job were used to calculate the unemployment rate, and this subtle difference in statistical method implies that the unemployment rate gap between the two countries is much bigger than it seems when looked through the lens of the official statistics.