Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Tuesday, October 22, 2013

Employment slumps in Canada and the U.S.

Some time ago I wrote about the prospect of the U.S. economy going through a Canadian-style slump (see here). To summarize: The recession that hit Canada and the U.S. in the early 1990s was much more severe in Canada than in the U.S., and the recovery in Canada took almost a decade to complete. In 2008, the tables appear turned. In what follows, I plot the employment-to-population ratio for Canada from 1989:1 - 2003:1 and match it up against the same ratio for the U.S. beginning in 2007:1 - present. The parallels thus far are striking.

Let's start with the employment ratios (courtesy of my able research assistant, Li Li) for the whole population in both countries: (All starting points normalized to 100 -- the actual employment rates are close in any case.)

This shows that the slump, as measured by the drop in employment, was about the same magnitude for Canada in 1990-91 as for the United States in 2008-09. The recovery dynamic in both cases appears to be painfully slow.

Let's now decompose employment across various age groups.





In terms of young and prime-age workers, the U.S. looks a little more depressed relative to the Canadian experience. The experience of older U.S. workers seems less depressed (but the behavior of older workers since the mid 1990s is influenced by a change in secular dynamics, so perhaps should not be viewed as a recovery dynamic.)

Now let's decompose by age and sex. Here we have the data for adult men:


And here we have the age-sex decomposition for men:






The correspondence between those aged 20-55 (the bulk of the population) is very close. Here is the data for adult females:


And here is the age-sex decomposition for women:






The most recent U.S. recession is sometimes labeled a "mancession" in reference to the fact that men appear to have been particularly hard hit (my colleague Silvio Contessi and my RA Li Li talk a bit about this phenomenon here.) It is interesting to note that while this may have been the case, the data here suggest that U.S. females were nevertheless hit harder than their Canadian counterparts in the 1990s.

Just for fun, I asked Li Li to plot broad stock market indices: the TSX composite index for Canada and the S&P 500 for the U.S. (both series have been adjusted for inflation).


Anyone willing to bet against the EMH?

At this point, I'm not entirely sure how to interpret this data. My feeling is that something useful may come out of studying the Canadian episode in greater detail. Maybe a few Ph.D. students are willing to take up the challenge?

 

13 comments:

  1. This is neat. I suspect that a lot of Canadian PhD students are probably too young to have any intuition about the early-90s recession in Canada, though. I certainly had no idea that labor force participation dropped so much.

    ReplyDelete
    Replies
    1. Andrew: you might want to take a look at this as well, http://andolfatto.blogspot.com/2012/09/how-canada-saved-its-bacon.html

      Delete
  2. Interesting. A couple of thoughts:

    1. The 20-24 (both men and women) and the 25-54 (men) are the graphs that are closest for US and Canada. I think that is because those graphs tell the clearest story about AD shocks. Because: the 55+ graphs are affected by demographic changes (the boomers); the 25-54 (women) graphs are affected by women's increasing participation rates; the 15-19 are affected by changing participation rates in post-secondary education.

    2. The 1991 Canadian recession was associated with inflation falling from an around 4%-5% trend in the late 1980's to the new 2% inflation target in the 1990s.

    3. So the US simply follows Canada, eh?

    ReplyDelete
    Replies
    1. Yes, should perhaps focus on the 20-55 male group to control for demographics. U.S. follows Canada? I've been toying with that conjecture for a while now. But who knows? Nick, you should be able to write on this -- you must have a clear recollection of the 90s in Canada. What ever happened to the Macklem-Fortin debates?

      Delete
  3. One should look at productivity and wage differences between Canada and US and how recessions impact employment considering these differences (especially important for some provinces like Québec where productivity/wages are low and the 2008 recession impact relatively small in comparison to the US).

    ReplyDelete
  4. Thank you for a very interesting post.

    Could you also tell us a little more about the causes of the 1990-1991 recession in Canada? I followed your link to what you wrote previously (which was also quite interesting) but it was harder to find something describing why Canada had such a sharp recession in 1990-1991. I also tried google without much luck.

    While it seemed like there were a few areas with expensive housing, it didn't look like a nationwide housing bubble like in the US. Do you think the problem was that Canada responded with much more austerity (in terms of spending cuts) and that turned a "normal" recession into such a bad one or was there something else that made the 1990-1991 recession so bad in Canada?

    Thanks

    ReplyDelete
    Replies
    1. Causes? Here are some candidates:

      http://en.wikipedia.org/wiki/Early_1990s_recession

      There may have been something to the "austerity" measures taken by the finance minister Paul Martin. It may also be the case that the "short term" pain laid the groundwork for longer term resilience. I would like to investigate.

      Delete
    2. Thanks. That lists some generic causes (which are good to know), but it doesn't explain why Canada was hit so much harder than other countries. From what I see, unemployment hit over 12% in Canada for the 1990 recession but didn't even reach 9% in the 2008--2009 recession or go much above 8% in the 2001 recession. From the unemployment data anyway, it sure seems like something different was going on in Canada in the 1990 recession than in other recessions in Canada or in other countries in 1990. I'd love to know if you have any thoughts on that. Thanks.

      Delete
    3. Cmdt.Ed,

      Am looking in to it. We might want to look for sectoral explanations. I recall that central Canada (Ontario & Quebec) were hit harder in the 90s relative to other parts of the country (this is where the manufacturing is centered). The opposite was true in the 1981-82 recession. So, I wonder whether U.S. states with similar industrial structure to Ontario experienced something as severe as Canada.

      Delete
    4. David,

      As I recall, there is something to the manufacturing story & exchange rates. As the Canadian dollar strengthened in the early 1990s from very low values to the $US in the 1980s, manufacturers faced losses because sales to the US went down.

      I did find this paper on the issue, not sure if you've read it yet: http://www.jstor.org/stable/136214. The author ends up blaming monetary policy & fiscal policy, saying they were too tight in Canada during that period. It's an interesting read, but I think it's an issue worth revisiting.

      Delete
    5. Thanks Prof J. Yes, I'm aware of this piece by Fortin, and by the rebuttal by economists at the BOC. But I haven't seen anything published on the subject since then.

      Delete
    6. Thanks Prof J! I'll take a look at the paper and follow the thread through the literature.

      Delete