Recently, many analysts have criticized Statistics Canada’s high-profile labour force survey for some odd movements in its data. First, the fourth-quarter data suggested that Quebec was losing jobs faster than during the 2008-2009 recession. With none of the other major data series for Quebec showing this kind of weakness, the result was widely-attributed to an anomaly in the survey. Then, employment in the finance, insurance and real estate industry fell by 75,000 between August, 2011, and January, 2012, before suddenly reversing course and recovering by 41,000 in February alone.
These sudden and apparently inexplicable movements were a good lesson for analysts about the variability of the labour force survey estimates when one starts to drill down from the national totals to the underlying industry and provincial detail.
In light of this recent experience for Quebec and the finance industry, analysts could be forgiven if they questioned the survey’s estimate of a sharp reversal in employment in both professional, technical and scientific services as well as trade early this year. But for these industries, there is some reason to believe the survey estimates may be accurately capturing a sudden shift in employment in these industries.
Professional, scientific and technical services include a wide range of industries, such as lawyers, computer services and accountants. This industry expanded rapidly in the last six months of 2011, but then gave back almost all these gains in the first two months of 2012.
I asked some friends in the industry if there was a specific event that could explain such a pattern, and was taken aback by their vociferous response. Accountants raved about the importance of the industry switching from Generally Accepted Accounting Principles to the International Financial Reporting System that occurred on Jan. 1, 2012. They described it as analogous to the Y2K changeover in the computer industry, requiring extra hiring to make the switch and even purchase new software to support it.
While the drop in professional jobs was spread out across the country, the drop in trade employment was heavily-concentrated in Quebec. This makes the explanation much easier to identify. Quebec raised its provincial harmonized sales tax on Jan. 1, 2012, just as it did a year earlier. Not surprisingly, consumers rush to make purchases before such a tax hike, and sales then slump in the months after the hike takes effect. With the experience from a year earlier to draw on, it appears retailers in Quebec let workers go early in 2012 when sales probably would be slow.
The graph above shows the combined impact of these irregular events in depressing employment in the PST and trade industries. At the same time, removing these two industries and then recalculating the national total reveals a much different underlying trend. Instead of the flat trend published in the national total, you can now see a marked pick-up in most industries.
This strengthening trend in employment is being driven by the most cyclically-sensitive industries, notably manufacturing and natural resources. This reflects widespread reports of a palpable improvement in the U.S. economy, and is why the Bank of Canada is now musing about a hike to interest rates sooner than expected.
Philip Cross is a senior fellow at the C.D. Howe Institute and former chief economic analyst at Statistics Canada.