Monitoring Jobs and Inflation

Employment and Unemployment Overview

• In May 2020, during the COVID-19 pandemic:

  • 2.7 million Canadians wanted a job but could not find one.

  • Many more had given up searching or had settled for part-time jobs.

• Historical job creation context:

  • Canadian economy creates numerous jobs; even during the 2009 recession, 16.6 million Canadians were employed.

  • Recent population growth outpaced job growth, causing persistent unemployment issues.

The Problems of Unemployment

• Consequences of Unemployment:

  • Lost Incomes and Production: Direct impact on economic performance and individual income.

  • Lost Human Capital: Skills, knowledge, and experience deteriorate during unemployment.

  • Loss of income can be devastating.

  • Unemployment benefits provide a safety net but do not fully replace wages; not all individuals qualify for benefits.

  • Prolonged unemployment damages job prospects through lost skills and work experience.

Labour Force Survey by Statistics Canada

• Every month, Statistics Canada conducts a Labour Force Survey:

  • Surveys approximately 54,000 households.

• Population Overview:

  • Divided into two main groups:

  • Working-age population: Total number of individuals aged 15 and over.

  • Non-working population: Individuals under 15 years and retirees.

Categories of Employment

• Labour Force Structure: - Two groups:

  • In the Labour Force: Includes those employed or unemployed.

  • Not in the Labour Force: Individuals not actively seeking work.

• Employment Calculation:

  • Labour force = Number of employed + Number of unemployed.

• Unemployment Definition:

  • To be categorized as unemployed, individuals must be:

  • On temporary layoff with an expectation of recall.

  • Without work but made specific efforts to find employment in the past four weeks.

  • Have a job offer that starts within four weeks.

Labour Market Statistics (as of May 2020)

• Overview of Statistics:

  • Total Population: 37.97 million.

  • Working-age Population: 31.11 million.

  • Labour Force: 19.29 million.

  • Employment: 16.63 million.

  • Unemployment: 2.66 million.

• Employment Types:

  • Full-time Employment: 16.63 million.

  • Part-time Employment: 2.58 million.

  • Voluntary Part-time: 1.93 million.

  • Involuntary Part-time: 0.65 million.

Key Labour Market Indicators

• Unemployment Rate:

  • Percentage of the labour force that is unemployed.

  • Formula:
    $\text{Unemployment Rate} = \left( \frac{\text{Number of people unemployed}}{\text{Labour Force}} \right) \times 100$

• Involuntary Part-Time Rate:

  • Percentage of the labour force working part-time but wanting full-time jobs.

  • Formula:
    $\text{Involuntary Part-Time Rate} = \left( \frac{\text{Number of involuntary part-time workers}}{\text{Labour Force}} \right) \times 100$

• Labour Force Participation Rate:

  • The percentage of the working-age population that is active in the labour market.

  • Formula:
    $\text{Labour Force Participation Rate} = \left( \frac{\text{Labour Force}}{\text{Working-Age Population}} \right) \times 100$

• Employment Rate:

  • The percentage of the working-age population with jobs.

  • Formula:
    $\text{Employment Rate} = \left( \frac{\text{Employment}}{\text{Working-Age Population}} \right) \times 100$

Alternative Unemployment Measures and Definitions

• Purpose of the Unemployment Rate: To measure the underutilization of labour resources.

• Stats Canada recognizes limitations:

  • Official figure excludes:

  • Discouraged job seekers (individuals not working or looking for a job but desire one and previously searched).

  • Those previously long-term unemployed (unable to secure part-time work).

  • Most costly unemployment is long-term unemployment caused by job loss.

• Alternative Unemployment Measures:

  • Narrower Measures (R-1, R-2): Focus on personal costs of unemployment.

  • Broader Measures (R-4, R-5, R-6): Assess the quantity of underemployed labour resources.

Types of Unemployment

• Frictional Unemployment:

  • Temporary unemployment resulting from job transitions.

  • Increases during labor market shifts and when unemployment benefits incentivize job searching.

  • Considered a normal part of a healthy economy.

• Structural Unemployment:

  • Arises from technological advancements and foreign competition that alter job skill requirements or job locations.

  • Typically lasts longer than frictional unemployment.

• Cyclical Unemployment:

  • Results from the business cycle; peaks during economic downturns and dips during recoveries.

Natural Unemployment and Full Employment

• Natural Unemployment:

  • Reflects frictional and structural unemployment only, not cyclical unemployment.

  • Changes over time due to factors like:

  • Age distribution of the population.

  • Scale of structural change.

  • Real wage rates.

  • Unemployment benefits.

• Full Employment:

  • Defined as the point where the unemployment rate equals the natural unemployment rate.

  • At full employment, all existing unemployment is either frictional or structural, avoiding cyclical unemployment.

GDP and Unemployment

• Potential GDP:

  • The value of real GDP produced at full employment.

• Output Gap:

  • The differential between Real GDP and Potential GDP.

  • Fluctuates throughout the business cycle, with unemployment rates oscillating near the natural unemployment rate.

Price Level, Inflation, and Deflation

• Definitions:

  • Price Level: Reflects average prices across the economy.

  • Inflation: Consistent increase in price level.

  • Deflation: A consistent decrease in price level.

• Importance of Monitoring Price Levels:

  • Understand inflation or deflation rates.

  • Distinguish between monetary and real economic values.

• Impacts of Inflation and Deflation:

  • Steady and anticipated rates are manageable; unpredictable changes can:

  • Redistribute income and wealth.

  • Decrease real GDP and employment.

  • Divert resources from production.

  • Severe inflation leads to hyperinflation, where money loses value rapidly.

Consumer Price Index (CPI)

• CPI Definition:

  • Measures average prices paid by urban consumers for a fixed basket of goods/services.

  • Standardized to equal 100 for the reference base period (currently set in 2002).

• CPI Construction Process:

  • Selection of a CPI basket from consumer expenditure surveys.

  • Monthly price surveys conducted by Stats Canada on major cities.

  • Calculation involves the cost comparison of the CPI basket across defined periods.

  • CPI Calculation Formula:
    $\text{CPI} = \left( \frac{\text{Cost of basket at current-period prices}}{\text{Cost of basket at base-period prices}} \right) \times 100$

Measuring Inflation Rate with CPI

• Inflation Rate Calculation:

  • Measures percentage change in price levels annually.

  • Formula:
    $\text{Inflation Rate} = \left( \frac{\text{CPI this year} - \text{CPI last year}}{\text{CPI last year}} \right) \times 100$

Limitations of CPI and Biases

• The CPI may overstate inflation due to several biases:

  • New Goods Bias: New items entering the market may carry a higher price.

  • Quality Change Bias: Price increases may reflect quality improvements rather than true inflation.

  • Commodity Substitution Bias: The fixed nature of CPI may not account for consumer shifts toward products with decreased prices.

  • Outlet Substitution Bias: Changes in retail structures lead consumers to purchase from cheaper channels not represented in the CPI.

• Magnitude of Bias:

  • Estimates suggest CPI overstates inflation by approximately 0.6% per annum.

  • Long-term implications distort contracts and increase government expenditures linked to price levels.

Alternative Price Indexes

• Alternative Measures:

  • GDP Deflator:

  • Formula:
    $\text{GDP Deflator} = \left( \frac{\text{Nominal GDP}}{\text{Real GDP}} \right) \times 100$

  • Broader measure than the CPI as it includes all final expenditures on produced goods/services.

  • Chained Price Index for Consumption (CPIC):

  • Formula:
    $\text{CPIC} = \left( \frac{\text{Nominal consumption expenditure}}{\text{Real consumption expenditure}} \right) \times 100$

  • Incorporates shifting quantities and addresses biases present in CPI.

• Core Inflation Rate:

  • Excludes volatile components from CPI to reflect the inflation trend adequately.

  • Monitored by the Bank of Canada using three measures: CPI-trim, CPI-median, and CPI-common.

• The most reliable core measure used is CPI-trim, which helps mitigate oscillations in the CPI inflation rate.

Real Variables in Macroeconomics

• Real Wage Rate Calculation:

  • Utilizes GDP deflator to adjust nominal values to real values.

  • Formula:
    $\text{Real Wage Rate} = \left( \frac{\text{Nominal Wage Rate}}{\text{GDP Deflator}} \right) \times 100$

• Note on Real Interest Rate:

  • Differentiates from other real values and requires a different consideration.