Question

Plot the differences in unemployment rate of the US and Canada. What can explain(s) the differences in unemployment rate of the US and Canada?

Answer 1

The gap between US and Canadian unemployment rates is bigger than it appears.

At 8.1% the unemployment rate in the United States is about one percentage point above the 7.2% currently reported for Canada, but this gap would be almost two percentage points if the Canadian rate was measured in the same way as the American.

This revealing picture from the recent Canadian federal government Budget paints a more accurate portrait by using unemployment rates defined in a similar way across the two countries.

The left panel shows the evolution of employment compared to its level in 2006. The striking fall and incomplete recovery in the US is all the more evident by the comparison to Canada. These numbers can be confidently compared because they are defined and measured in the same way on both sides of the border.

The right panel shows that the gap between the American and Canadian unemployment rates is much bigger when a comparable Canadian statistic is used in place of the headline measure regularly reported by Statistics Canada.

While the statistical agencies in both countries use the same methods to describe the jobs market, the gap between the unemployment rates rests on a couple of subtle differences in the criteria used to classify someone as unemployed.

It is a common mis-perception that these statistics are based on government programs like unemployment insurance, and the administrative data generated from them.

A nicely written paper by Constance Sorrentino, an analyst with the Bureau of Labor Statistics, carefully places these concepts in an international context, summarizes the research on the Canada-US unemployment gap, and explains all the differences in statistical methods between the two countries.

Passive search methods have been on the rise because as the duration of unemployment spells increases, the longer-term unemployed become more discouraged and therefore more likely to uniquely use them as they step closer and closer to giving up looking altogether.

Writing in 2010 Sorrentino claims that a rise in the use of passive job search methods in Canada is an important part of the explanation for the difference in unemployment rates. If the Canadian unemployment rate were adjusted to US concepts it would be reduced by 1 percentage point.

As the picture from the Budget makes clear, this is exactly the case now.

The Canadian unemployment rate would be lower if only those actively looking for a job were used to calculate the unemployment rate. This subtle difference in statistical method implies that the unemployment rate gap between the two countries is much bigger than it seems when looked through the lens of the official statistics.