The Unemployment Rate Lie—September 2014 print edition

What does a seven-percent unemployment rate really mean?

October 7, 2014
by By Michael Hlinka

From the September 2014 print edition

If you go to the Statistics Canada website—the organization in this country responsible for compiling data on a variety of subjects—you’ll see (as of late August) that the unemployment rate in this country is seven percent.

This is what seven percent would mean to most people. If you took 100 people of working age, you would find that 93 are working and seven are unemployed. If only it were that straightforward…and transparent.

In order to calculate the unemployment rate, we have to start with something called the participation rate. This is the percentage of people aged 15 to 65 who are either working (employed) or actively looking for work (the unemployed). The participation rate excludes two very important groups: discouraged workers and full-time students.

A discouraged worker is someone who has even given up looking for jobs after having faced so much disappointment in the past. I’m not particularly sympathetic to this type of person, but the fact remains that he or she is unemployed. It has been estimated that in the US, there may be as many as 750,000 discouraged workers, which would push up the unemployment rate in that country to 6.7 percent from the reported 6.2 percent.

Then there’s the reality of more and more young people extending their education because of softness in the labour markets. My day job is teaching financial planning at George Brown College. In the past few years, my school has rolled out any variety of one-year certificate programs—a couple of examples are financial planning and marketing financial services management. Many of the students are international, using the education system as a way of doing an end run around the typical immigration process. But there is also a significant cohort of Canadians who have graduated from university programs but don’t have the “skills” to secure employment.

Here’s my problem with that. When I graduated from high school (which was in the mid-1970s), I have distinct memories of at least a couple of young women from my Grade 13 class who immediately went to work as bank tellers, or as they are called today, Customer Service Representatives. The reality is that the job market is so anemic that financial institutions are increasingly in the driver’s seat and can ask for—and get—older, more mature workers with higher credentials than they ever could have in the past.

Then there’s the part-time worker phenomenon. For every four Canadians who have full-time hours, there is one working part-time. And that part-time worker who may be putting in as few as fifteen hours a week, is considered as fully employed as someone else toiling from nine to five.

It’s no mystery why the powers-that-be would like to systemically under-state unemployment. If there is one metric that politicians are judged on—fairly or unfairly—it is the unemployment rate. They (and this pertains to all parties) want to skew the numbers lower than they really are.

There is a much better way to judge the health of the labour market.

Simply, take all the people in Canada who are of working age, which really should be 16 to 65 years old. Establish that a typical workweek is 40 hours. And then multiplicatively work out the theoretical maximum number of hours that could be worked in the measurement period, which is currently a month.

To keep the numbers simple, let’s assume that there are 30 million Canadians who range from 16 to 65. Which means that the potential number of hours worked would be 30 million x 40 hours x 4 weeks for a total of 4.8 billion hours that could be worked.

Now you do the survey. Ask folks how many hours they worked in the past month. Then you express that as a ratio of the total potential hours that could be worked.

What would this do? It would capture the difference between part-time and full-time work. It would also capture overtime hours. And it would provide a much better indication of how fully utilized the labour force is at any point in time.

We would find that there is some “correct” level associated with a healthy economy. My guess is that if you conducted this type of survey in a province like Alberta, you’d have a very good idea of what full employment really looks like. On the other hand, you’d look at Ontario and…probably have nightmares. The current numbers suggest that unemployment stands at 7.5 percent, but all the anecdotal evidence I hear—and what I observe—suggests that a truer indication is at least 10 percent and probably higher.

But this isn’t something we should have to guess about. If we started tracking hours worked as a percentage of the total hours that could be worked, we’d have a true picture of employment.
Toronto-based Michael Hlinka provides business commentary to CBC Radio One and a column syndicated across the CBC network.