Unemployment Fluctuations and the NAIRU

Long Run Trends: In the long run, increases in the labour force are more or less matched by increases in employment.
Short Run Trends: In the short run, the unemployment rate fluctuates considerably because changes in the labour force are not exactly matched by a corresponding change in employment.

Employment Growth Data:
- In 1976, there were approximately 9.7 million employed Canadians.
- By January 2020, total employment reached 19.2 million.
Determinants of Employment:
- The actual amount of employment is determined by both the demand for labour and the supply of labour.
Causes of Labour Force Increase:
- A rising population, boosting entry into the labour force of people born 15 to 25 years previously.
- Increased labour force participation, especially among women.
- Net immigration of working-age persons.

Unemployment Trends:
- 1980s: Worldwide unemployment rose to high levels.
  - High of over 12% in 1983, fell to 7.5% by 1988.
- Early 1990s Recession:
  - Unemployment rate reached 11.3% by 1992, dropped to 6.8% by early 2000 after recovery.
- 2008 Worldwide Recession:
  - Canadian unemployment peaked at 8.7% in mid-2009, performed better than others.
- COVID-19 Pandemic:
  - Unemployment rose from 5.8% before the pandemic to 13.7% shortly after its onset.
  - Rate declined throughout 2020 and into 2021 as parts of the economy reopened.

From 2014 to 2016, the Canadian unemployment rate was roughly constant at 7%.
Dynamic Labour Market Activity: Despite constant unemployment rate, workers found jobs at a rate of 500,000 to 600,000 per month, while others left jobs or entered the labour force at similar rates.
Activity in the labour market is better reflected by the flows into and out of unemployment than by the overall unemployment rate.

Understated Effects of Recession: Official data do not include discouraged workers or underemployed workers, leading to an understatement of the full effects of recessions on unemployment.
Consequences of Unemployment: Two critical costs associated with unemployment:
- Loss of output.
- Personal costs.

Market-Clearing Theories:
- In market-clearing theories, real GDP = Y*.
- Unemployment is solely frictional and structural, leading to a consistent NAIRU.
Cyclical Unemployment:
- This unemployment arises not from frictional or structural factors but from deviations of real GDP from Y*.

Causes of Employment Fluctuations:
- Changes in technology affecting the marginal product of labour change the demand for labour.
- Changes in willingness to work adjust the supply of labour.
Assumptions of Market-Clearing Theories:
- Real wages adjust to clear the labour market.
- Workers not employed have voluntarily withdrawn from the labour market (no involuntary unemployment).

Description:
- When wages do not adjust quickly (sticky wages), there is unemployment during economic downturns and labour shortages in economic booms.
Reasons for Wage Stickiness:
- Long-term employment relationships.
- Menu costs (costs of changing prices).
- Efficiency wages (higher wages to boost productivity).
- Union bargaining power.

Understanding NAIRU:
- NAIRU is reached when real GDP is equal to potential output, resulting in only frictional and structural unemployment.
Types of Unemployment:
- Frictional Unemployment: Normal turnover of labour persists even at potential output.
- Structural Unemployment: Arises from economic changes and policies inhibiting change. Example: The COVID-19 pandemic caused a significant mismatch in skills, experience, and industry between unemployed workers and new job vacancies.
Frictional-Structural Distinction:
- Structural unemployment can be viewed as long-term frictional unemployment.
- If reallocation of labour occurs quickly due to changes (e.g., car parts vs. car assembly), it is characterized as frictional; if slow, it is structural.
- Structural and frictional unemployment together are separable from cyclical unemployment.

Demographic Shifts:
- Increased labour force participation among groups with higher unemployment rates raises NAIRU.
- Young worker proportion in the labour force rose significantly with the baby boom generation entering in the 1970s and 1980s, increasing NAIRU, while aging reduced it in the late 1990s.
- Historically, women had higher unemployment rates; increased female participation in the labour force in earlier decades resulted in higher NAIRU.
- Recent declines in female unemployment rates below male rates indicate that ongoing increases in female participation may lower NAIRU.
Globalization and Structural Change:
- Canadian labour markets are increasingly influenced by global demand and supply changes, consequently increasing NAIRU due to the necessity for frequent adjustments.
- Policies that reduce labour-market flexibility are likely to increase NAIRU.

Cyclical Unemployment Approach:
- Debate on the extent of government intervention in reducing cyclical unemployment, with differing opinions:
  - Advocates call for expansionary fiscal/monetary policies to reduce recessionary gaps.
  - Others prefer a hands-off approach, relying on market adjustments.
2020 Pandemic Recession:
- The pandemic recession presented unique challenges requiring unconventional policies due to its extraordinary causes and implications for employment.

Frictional unemployment is considered inevitable.
Employment Insurance (EI) helps individuals cope but contributes to search unemployment.
Revisions to the EI program have shifted focus to those generally in need rather than only job seekers, which has contributed to a decline in frictional unemployment.

Frequently driven by technological advancements.
Expected to increase due to artificial intelligence and automation.
Two strategies to reduce structural unemployment:
1. Resist changes (not a recommended approach).
2. Assist adjustments through retraining and improved labour-market information flow, as highlighted in Canada's federal budget initiatives.

The nature of unemployment can be seen as a flawed market system or a necessary evil.
Fiscal and monetary policies aim to mitigate persistent recessionary gaps.
Social policies (like EI) seek to alleviate the burdens of unemployment.
Success in the global market alongside humane social welfare systems will depend on the ability to adapt to economic landscape changes.