Britain had an unemployment rate of 7.7 percent in early 2011, up from just 5.7 percent in 2008. That was bad. But the Canadian unemployment rate was slightly worse. Figure 8-1 shows the Canadian unemployment rate annually from 1946 to 2011; as you can see, unemployment soared during the 2008–2009 recession and had fallen only modestly by 2011. What did the rise in the unemployment rate mean, and why was it such a big factor in people’s lives? To understand why policy-makers pay so much attention to employment and unemployment, we need to understand how they are both defined and measured.

It’s easy to define employment: you’re employed if and only if you have a paid job. Employment is the total number of people aged 15 and older currently employed, either full time or part time.

Unemployment, however, is a more subtle concept. Just because a person isn’t working doesn’t mean that we consider that person unemployed. For example, as of May 2012, there were just more than 5 million retired workers in Canada receiving Old Age Security benefits. Most of them were probably happy that they were no longer working, so we wouldn’t consider someone who has settled into a comfortable, well-earned retirement to be unemployed. There were also about 330 thousand disabled Canadian workers receiving Canadian Pension Plan benefits because they were unable to work. Again, although they weren’t working, we wouldn’t normally consider them to be unemployed.

By one criterion, Statistics Canada, the federal agency tasked with collecting data on unemployment, considers the unemployed to be those who are “… without work, … looking for work, and … available for work.” Retired people don’t count because they aren’t looking for jobs; the disabled don’t count because they aren’t available for work. More specifically, an individual aged 15 or older is considered to be unemployed if he or she

Individuals on temporary layoffs and those waiting for a new job to start in the next four weeks or less are considered unemployed if they satisfy conditions 1 and 2. Individuals on either maternity leave or paternity leave are not considered to be unemployed in the official labour force statistics. But, if certain conditions are met, these individuals may qualify for employment insurance (EI) benefit payments similar to those received by some unemployed workers.

So unemployment is defined as the total number of available people who aged 15 and older are actively looking for work but aren’t currently employed. A country’s labour force is the sum of employment and unemployment—that is, of people who are currently working and people who are currently looking for work, respectively. The labour force participation rate, defined as the share of the working-age population that is in the labour force, is calculated as follows:

The unemployment rate, defined as the percentage of the total number of people in the labour force who are unemployed, is calculated as follows:

To estimate the numbers that go into calculating the unemployment rate, Statistics Canada carries out a monthly survey called the Labour Force Survey, which involves interviewing a random sample of 56 000 households across Canada. People are asked whether they are currently employed. If they are not employed, they are asked whether they have been looking for a job during the past four weeks. The results are then scaled up, using estimates of the total population, to estimate the total number of employed and unemployed Canadians.

In general, the unemployment rate is a good indicator of how easy or difficult it is to find a job given the current state of the economy. When the unemployment rate is low, nearly everyone who wants a job can find one. In 2007, when the unemployment rate averaged 6%, jobs were so abundant that employers spoke of a “mirror test” for getting a job: if you were breathing (therefore your breath would fog a mirror), you could find work. By contrast, in 2011, with the unemployment rate at 7.5%, it was harder to find work. In fact, there were almost six times as many Canadians seeking work as there were job openings.

Although the unemployment rate is a good indicator of current labour market conditions, it’s not a literal measure of the percentage of people who want a job but can’t find one. That’s because in some ways the unemployment rate exaggerates the difficulty people have in finding jobs. But in other ways, the opposite is true—a low unemployment rate can conceal deep frustration over the lack of job opportunities.

How the Unemployment Rate Can Overstate the True Level of Unemployment If you are searching for work, it’s normal to take at least a few weeks to find a suitable job. Yet a worker who is quite confident of finding a job, but has not yet accepted a position, is counted as unemployed. As a consequence, the unemployment rate never falls to zero, even in boom times when jobs are plentiful. Even in the buoyant labour market of 2007, when it was easy to find work, the unemployment rate was still 6%. Later in this chapter, we’ll discuss in greater depth the reasons that measured unemployment persists even when jobs are abundant.

How the Unemployment Rate Can Understate the True Level of Unemployment Frequently, people who would like to work but aren’t working still don’t get counted as unemployed. In particular, an individual who has given up looking for a job for the time being because there are no jobs available—say, a laid-off steelworker in a deeply depressed steel town—isn’t counted as unemployed because he or she has stopped looking for work. Statistics Canada calculates the official measured unemployment rate. Although accurate, this rate is apt to be understated, because Statistics Canada omits workers in three categories: discouraged workers, marginally attached workers, and underemployed workers.

Discouraged workers are not working and have sought employment within the past 12 months; however, they are not currently seeking work because they feel they have little hope of getting a job in the current job market.

Marginally attached workers are not currently working and have stopped seeking employment, too; however, they have stopped looking because they are waiting for employment to begin. For example, they may be waiting for recall after a layoff, for replies from potential employers, or for a new job to start in the next five or more weeks.

Underemployed workers do work, but not in the desired capacity. Visibly underemployed workers have jobs in which they work fewers hours than they would like to do. They may have part-time jobs, but would prefer to be working full time. Invisibly underemployed workers have jobs that do not use their skills fully or that are considered to be substandard, owing to low wages or some other disadvantage. Statistics Canada does estimate the number of visibly underemployed workers, but cannot estimate the number of invisibly underemployed workers—they are “invisible.”

Statistics Canada does include these three categories of frustrated workers in other “measures of labour underutilization.” Figure 8-2 shows what happens to the unemployment rate when these categories are included. The broadest measure of unemployment and underemployment, known as R8, is the sum of these three measures plus the unemployed. It is substantially higher than the rate usually quoted in the media. But R8 and the unemployment rate move very much in parallel, so changes in the unemployment rate remain a good guide to what is happening in the overall labour market, including frustrated workers.

Finally, it’s important to realize that the unemployment rate varies greatly by region and among demographic groups. Other things being equal, jobs are generally easier to find for more experienced workers and for workers during their “prime” working years, from ages 25 to 54. For younger workers, as well as workers nearing retirement age, jobs are typically harder to find.

Similarly, at any moment in time, jobs can be easier or harder to find in different regions of the country, regardless of which demographic group is being considered. Just as there is not really one single labour market for all demographic groups nationally, neither is there just one single labour market for all regions. Different regions may well have macroeconomic conditions and trends that differ from those of the nation as a whole. The job market in resource-producing regions of the country, such as Alberta, Saskatchewan, and Manitoba, can boom while job markets in other provinces may trend downward.

Figure 8-3 shows the unemployment rates for different groups in October 2007, when the overall unemployment rate (5.3%) was low by recent historical standards. As you can see, at this time, the unemployment rate for youth (ages 15–24) was double the national average; the unemployment rate for youth with university degrees was two-thirds of the national average. (Bear in mind that a youth is not considered unemployed, even if he or she is not working, unless that youth is looking for work and cannot find it.) Regional factors also play a role. Unemployment rates in the Prairie Provinces tend to be lower than the national average, owing to their economic structure and the high world demand for their output (wheat, oil, and other commodities). For example, in Alberta in 2007, labour market conditions were so strong that the unemployment rates for all groups were significantly below the national rate. On the other hand, unemployment rates in Atlantic Canada were higher than the national average. In October 2007, the average unemployment rate in Newfoundland and Labrador was more than twice the national average, and the youth unemployment rate was also 6.3 percentage points higher than the comparable national one; the only exception was for university graduates, indicating that people who have human capital (more education) are less likely to suffer from unemployment even in a tough job market.

So even at a time when the overall unemployment rate was relatively low, jobs were hard to find for some groups.

So you should interpret the unemployment rate as an indicator of overall labour market conditions, not as an exact, literal measure of the percentage of people unable to find jobs. The unemployment rate is, however, a very good indicator: its ups and downs closely reflect economic changes that have a significant impact on people’s lives. Let’s turn now to the causes of these fluctuations.

Compared to Figure 8-1, Figure 8-4 shows the Canadian unemployment rate over a somewhat shorter period, the years from 1976 to 2012. The shaded bars represent periods of recession. As you can see, during every recession, without exception, the unemployment rate rose. The severe recession of 2008–2009, like the earlier two recessions, led to a significant rise in unemployment.

Correspondingly, during periods of economic expansion the unemployment rate usually falls. The long economic expansion of the 1990s eventually brought the unemployment rate down to 6.3%, and the expansion of the mid-2000s brought the rate down to 5.3%. However, it’s important to recognize that economic expansions aren’t always periods of falling unemployment. Look at the periods immediately following the recessions of 1990–1991 in Figure 8-4. The unemployment rate continued to rise for more than a year after the recession was officially over. The explanation is that although the economy was growing, it was not growing fast enough to reduce the unemployment rate.

Figure 8-5 is a scatter diagram showing Canadian data for the period from 1946 to 2010. The horizontal axis measures the annual rate of growth in real GDP—the percent by which each year’s real GDP changed compared to the previous year’s real GDP. (Notice that there were four years in which growth was negative—that is, real GDP shrank.) The vertical axis measures the change in the unemployment rate over the previous year in percentage points. Each dot represents the observed growth rate of real GDP and change in the unemployment rate for a given year. For example, in 2000 the average unemployment rate fell to 6.8% from 7.6% in 1999; this is shown as a value of –0.8 along the vertical axis for the year 2000. Over the same period, real GDP grew by 5.2%; this is the value shown along the horizontal axis for the year 2000.

The downward trend of the scatter diagram in Figure 8-5, as indicated by the blue “line of best fit,” shows that there is a generally strong negative relationship between growth in the economy and the rate of unemployment. Years of high growth in real GDP were usually years in which the unemployment rate fell, and years of low or negative growth in real GDP were years in which the unemployment rate usually rose.

The green vertical line in Figure 8-5 at the value of 3.62% indicates the average growth rate of real GDP over the period from 1946 to 2010. Points lying to the right of the vertical line are years of above-average growth. In these years, the value on the vertical axis is usually negative, meaning that the unemployment rate fell. That is, years of above-average growth were usually years in which the unemployment rate was falling. Conversely, points lying to the left of the green vertical line were years of below-average growth. In these years, the value on the vertical axis is usually positive, meaning that the unemployment rate rose. That is, years of below-average growth were usually years in which the unemployment rate was rising.

A period in which real GDP is growing, perhaps at a below-average rate, and unemployment is rising (or at least not falling) is called a jobless recovery or a “growth recession.” Since 1990 there have been two recessions in Canada. The one from 1990 to 1991 was followed by a jobless recovery, while the one from 2008 to 2009 was not. The U.S. has had three recessions since 1990, all of which were followed by jobless recoveries. But true recessions, periods when real GDP falls, are especially painful for workers. As illustrated by the points to the left of the purple vertical line in Figure 8-5 (representing years in which the real GDP growth rate is negative), falling real GDP is always associated with a rising rate of unemployment, causing a great deal of hardship to families. The job loss that recessions create lowers the income and standard of living of many families, which can lead to other significant financial, physical, and emotional troubles for members of society.