25 June 2009

Upsurge in Unemployment

The following is written by Peter G. Hall, Vice-President and Chief Economist, Export Development Canada.

For economy-watchers, a new month brings a rush of the latest employment figures. It hasn’t been a particularly pleasant point in the calendar lately, and there’s a lot of concern about what next month’s release will hold. With the deluge of job losses we have seen to date, is the worst now behind us?

Broader economic indicators have recently stoked hope of imminent recovery. But employment is a lagging indicator; it is well known that the economy will have to recover before the job machine gets going again. What is more, employment is still reacting to the huge back-to-back drops that world output sustained in the last two quarters. As large layoff announcements are still quite common, the more pertinent question is, when are the job cuts likely to end?

The answer is different, economy-by-economy. Job losses hit the US economy first, and they have intensified in the past few months. As a result, the unemployment rate zoomed up to 9.4%, a 5 percentage point gain from the low point in late 2007. This puts the current situation on par with the 1981-82 recession, although the rise has been swifter this time. The latest labour force data suggest that the pace of US job-shedding may be easing, but it is too early to be conclusive.

Other key economies are not on par with previous recessions. France saw a 5.3 percentage point increase in the unemployment rate in the early 1980s, and a lesser 2.9-point rise in the early 1990s. To date, France’s rate has risen just 1.5 points. Similarly, in the current cycle Germany’s rate has been slower to rise than in the past. And despite its own gloomy economic news, the UK has not seen its unemployment rate take off. It is up 2 percentage points, but is a far cry from the 6.6 point gain in the early 1980s and the 3.8-point hike in the early 1990s. Job losses in Euroland began later than in the US, a key reason for more moderate unemployment rates. However, the declines in GDP imply that there are considerably more job losses ahead – the coming months will not be pretty.

Japanese unemployment has seen a relatively large increase. Structural factors suppress Japan’s gains, and this round is no different. Japan saw a 1 percentage point rise in the early 1980’s. The 1990’s were different – the protracted recovery and structural changes in the economy boosted the rate by 3.8 percentage points, and the rise was protracted, spanning a decade. To date, Japan’s unemployment rate is up 1.5 percentage points, and rising. Given the disastrous declines in output seen in the past six months, the economy hasn’t likely seen the end of job cuts quite yet.

How is Canada faring? Things were looking good until late last year. Since then, sharp drops in employment have prompted a rapid increase in the unemployment rate. To date, Canada has seen a 2.6 percentage point gain, well shy of the US increase, but well ahead of Europe. So far the increase is ahead of what we saw in 2001, but is still well shy of the 6-point and 4.8-point surges seen in the early 1980s and early 1990s, respectively. If the past is any guide, we can still expect to see further job cuts here before the labour market turns the corner.

The bottom line? It’s not a pleasant thought, but economic indicators strongly suggest that in industrialized economies, labour markets are not yet out of the woods. Timely and substantial policy stimulus, which will boost the economy this fall, will help, but sluggish conditions will persist.