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It is now more than four years since the Canadian unemployment rate spiked sharply upward in the autumn of 2008, and it has yet to return to its pre-recession level. (Moe Doiron/The Globe and Mail)
It is now more than four years since the Canadian unemployment rate spiked sharply upward in the autumn of 2008, and it has yet to return to its pre-recession level. (Moe Doiron/The Globe and Mail)

‘The natural rate’ being ignored in jobs talk Add to ...

A predictable ritual takes place every first Friday of the month when Statistics Canada releases the unemployment numbers. Expect it later this morning when the numbers for November are published. Movements amounting to tenths of a percentage point in the unemployment rate will be parsed, diced, and explained. And the assurances will be the same: “We have recovered all the jobs lost during the recession and then some; firms can’t find workers with the right skills; job vacancies are going unfilled.”

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Irrelevant. All of it.

The question to ask the minister of finance and his colleagues is: Has the economy returned to what Milton Friedman, the great University of Chicago economist, christened more than three decades ago as “the natural rate”?

In a recent speech, Diane Finley, the minister responsible for employment and training programs, made clear how the government views unemployment: “This past year, I’ve travelled across Canada and met with business leaders from all sectors of the economy. The one key message that they have repeated loud and clear… is that skills shortages are their most pressing concern. … we’ve got a mismatch in this country between what skills Canadians have ... and what is needed in the labour market.”

Citizenship and Immigration Minister Jason Kenney uses exactly this logic to argue for higher immigration levels, particularly of low-skilled and temporary workers who apparently are the only workers willing and able to take on the vacancies that so many businesses cannot fill.

The same thread runs through Mr. Flaherty’s budget priorities. If unemployment is due to these mismatches then the management of the macro-economy should be prudent, as lax monetary policy and government deficits will not fix the problem, and indeed will only generate more inflation. Thus, balanced budgets must take priority over lower unemployment.”

Prof. Friedman knew it wasn’t good enough to ask businesses about their unmet labour needs. There are always some companies with unmet needs, having to pay higher wages than they would like to attract workers; but there are others in the opposite situation, and the downward pressure on wages in these sectors is just another price signal that labour should move on.

For Mr. Friedman, the natural rate of unemployment was the rate consistent with steady change in overall wages, and ultimately with a constant rate of price inflation. Pushing unemployment below the natural rate risks a wage-price spiral; moving beyond it would imply declining rates of inflation, or even deflation.

But prudent macro-managers need to know how to interpret the numbers, is unemployment at the natural rate or not? If it is then the micro-managers like Ms. Finley and Mr. Kenney should address the problem. If it is above the natural rate then there is a case for fiscal policy not moving so quickly to balanced budgets.

It is now more than four years since the Canadian unemployment rate spiked sharply upward in the autumn of 2008, and it has yet to return to its pre-recession level, moving nowhere but sideways for more than a year. Does that mean the natural rate is around 7.5 per cent?

Mr. Flaherty’s officials must have an answer to this question, so must Mr. Carney’s. But my search of the Bank of Canada website revealed nothing, an informal e mail or two sent to a couple of my contacts working at the Bank drifted into nothingness, and a direct question to a former Bank economist led rapidly to a zipped pair of lips: “they made me sign a whole bunch of things when I left, I can’t say a thing.”

It might be reasonable to suspect the economy has not returned to the natural rate for the simple reason that there is absolutely no inclination of inflation rates rising beyond the 2 per cent target set by the Bank of Canada. Also all of the structural forces leading to a higher natural rate during the 1970s and 1980s have long been reversed: the young who have a tendency to cycle between jobs as they search for a career position are a smaller fraction of the labor force; unions have lost bargaining power; unemployment insurance benefits have been drastically reduced; corporate taxes have fallen.

The only possible argument for a higher natural rate would seem to be that the unemployed are for some reason more picky now, not willing to take the jobs that are available, an echo of Mr. Flaherty’s remark made last May that “There is no bad job, the only bad job is not having a job” . But it is hard to imagine these attitudes changing so abruptly to support a natural rate of unemployment as high as 7.5 per cent, when just before the recession an unemployment rate of 6 per cent was not generating inflationary pressures.

Are we there yet? Government policy is being conducted as if we are, but our ministers are offering only anecdote to support their logic, evidence that certainly would not have satisfied Prof. Friedman.

Miles Corak is a professor of economics with the Graduate School of Public and International Affairs at the University of Ottawa. You can follow him @MilesCorak, or read his blog at milescorak.com.

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