Why the Unemployment Rate is No Longer a Reliable Gauge of Labour Market Performance

Summary

• The unemployment rate has long been the single measure most used by the media, policymakers, and politicians to gauge overall labour market performance.
• However, the unemployment rate can decrease for two reasons that imply very different performance: 1) people are finding work, which is positive; or 2) potential workers are dropping out of the labour force and not looking for work anymore, which is usually negative.
• Prior to 2008, it was not a great concern that the media and others relied on the unemployment rate as a single measure of labour market performance because its results mirrored those of other measures, particularly the employment rate.
• But since peaking in 2008, the labour force participation rate has declined from 67.6 percent to 65.7 percent. It is expected to decline further, to roughly 61.0 percent by mid-century, due largely to our aging population.
• The decline in labour market participation rates since 2008 means that the unemployment and employment rates are now telling two very different stories about the state of Canada’s labour market.
• The employment rate, the share of the labour force that is employed, has fallen from 63.4 percent in 2008 to 61.1 percent in 2016. At the same time, however, because of falling labour market participation, the unemployment rate also fell—from 8.3 percent in 2009 to 7.0 percent in 2016.
• Given the falling rates of labour market participation, it is increasingly clear that the employment rate rather than the unemployment rate is a better barometer of the state of the labour market.