The return of the discouraged worker

This post originally appeared at Business in Canada.

In Mike Moffatt’s overview of the Canadian labour market and employment metrics, the professor explained that the unemployment rate can paint an inaccurate portrait of the strength of the labour market. This is in part because the unemployment rate fails to account for discouraged workers; people whose job prospects have turned so sour that they don’t bother looking for one at all – even though they’d like to be gainfully employed.

After an in-depth look at the trends in labour force participation rate (LFPR) by age group and gender back in March, we concluded that it was time to give up on the argument that would-be workers were giving up. The overwhelming majority of the decrease in the LFPR since the onset of the recession – which, in turn, has put downward pressure on the unemployment rate – could be attributed to the greying of the adult population and younger Canadians choosing to pursue educational opportunities.

But that may be changing.

To be sure, the data still do not tell us that we should be particularly worried about discouraged workers at this point in time, especially when it comes to the 25 to 54 year-old demographic. This is the age group in which people are most likely to have a job or be seeking one; accordingly, it is often referred to as the prime-age segment of the population.

From November 2013 to June 2014, the unadjusted number of discouraged workers in this age group rose from 8,500 to 14,200. While you could spin this as a 67-percent spike in the number of 25 to 54 year-olds who have given up on finding a job, that isn’t the best interpretation of the data. As Tammy Schirle, professor of economics at Wilfrid Laurier University, points out, it’s more prudent to consider this movement in the context of the population of Canadians ages 25 to 54: an increase from 0.06 percent of that demographic to 0.1 percent.

When you add discouraged searchers into the equation, the unadjusted unemployment rate for the 25 to 54 age group was 5.7 percent in June – only one tenth of a percentage point higher than the official rate.

So on the surface, this development may not cause for alarm. However, digging a little deeper, there’s reason to be concerned that Canadians between the ages of 25 and 54 are growing more and more frustrated with their chances of finding gainful employment.

A report published by Statistics Canada researchers André Bernard and Jeannine Usalcas included a chart showing that the LFPR for the prime-age population has dropped substantially from November 2013 to June 2014, a development that deserves attention and investigation. Here’s a look at the data they presented (which was adjusted so as to make an apples-to-apples comparison with the United States) along with the LFPR for prime-age Canadians commonly reported by Statistics Canada each month:

 

 

The discrepancy between the Canadian data and the figures adjusted for U.S. concepts can be explained by one key difference in methodology between the two countries. In Canada, if you’re a “passive” job seeker – which could mean as little as browsing Kijiji – you are counted as an unemployed member of the labour force. In the United States, this group is omitted from the labour force. One must be an “active” job seeker – sending out resumes or going to interviews – in order to be included as part of the labour force.

“In this case, active versus passive job seekers is going to have the biggest impact,” confirmed Jason Gilmore, acting chief of Statistics Canada’s labour analysis and special projects.

The fact that the LFPR for prime-age Canadians adjusted for U.S. concepts has fallen by more than the “Canadianized” data (-1.1 percentage points compared to -0.8 percentage points) tells us that number of “passive” job seekers in this demographic has been swelling over this period.

Since November, the unadjusted number of 25 to 54 year-olds who are not part of the labour force has increased by 74,300. More than half of these people – 40,000 – reported that they did not want to work or were not available to. So to a large extent, the decline in the LFPR for prime-age workers can be explained by people making the decision that they would rather not have a job.

Interestingly, among the reasons given by people ages 25 to 54 who are not in the labour force but would like work – illness, attending school, family responsibilities, and so on – the “other” category is the largest component, and the one that has seen the largest jump (19,300) from November 2013 to June 2014. So while the growth of discouraged workers explains relatively little of the decline in the prime-age LFPR, it’s hard to tell what is responsible.

Here’s what we do know: since November, prime-age Canadians have been less diligent in their quest to find employment, and the number of discouraged workers has been rising. If we assume that putting in less effort to find a job precedes putting in no effort at all – that these “passive” job seekers may be on their way to becoming discouraged workers and dropping out of the labour force altogether – then this development is very unsettling.

An uptick in discouraged workers amongst this segment of the population would be one of the more disturbing trends to materialize in Canada’s poorly performing labour market, which can be kindly described as in the midst of a mid-cycle slump, and more accurately characterized as deeply depressing.