Figure16-4Cyclical Unemployment and the Output Gap Panel (a) shows the actual annual unemployment rate from 1980 to 2011 in Canada, together with the OECD estimate of the natural rate of unemployment. The actual rate fluctuates around the natural rate, often for extended periods. Panel (b) shows cyclical unemploy-ment—the difference between the actual unemployment rate and the natural rate of unemployment—and the output gap, as estimated by the PBO. Cyclical unemployment and the output gap each move in the opposite direction: when the output gap is positive (i.e., actual output is above the natural rate level), the actual unemployment rate is below its natural rate (so the cyclical unemployment rate is low, perhaps even negative); when the output gap is negative, the actual unemployment rate is above its natural rate (so the cyclical unemployment rate is high). The two series track one another closely, showing the strong inverse relationship between the output gap and cyclical unemployment.
Sources: Statistics Canada; OECD; Parliamentary Budget Officer (PBO).