Introduction
The Canadian labor market is abundant with skilled and qualified workers, and hence, the country’s labor market is becoming increasingly competitive. In this context, it is necessary for the government to ensure that all these candidates are employed and getting paid fairly. However, it is identified that Canada’s unemployment rate soared high during the recent recession and it has not yet recovered completely. Since Canada is a well-developed country, it is particularly important for the Canadian federal government to analyze the short-term as well as long-term costs of high unemployment rate to the country’s economy. This paper will critically explore the real impacts of current high unemployment rate on the Canadian economy. The paper will also make some recommendations on how to improve the current unemployment scenario of the country.
Significance of the Topic
The chosen topic is of great importance because unemployment rate has been a crucial problem affecting the development of Canadian economy for years. It is identified that the issue of growing unemployment is not only hurting the growth of the overall Canadian economy but also adversely affecting individual lives. Over the period 1966-2016, Canada’s unemployment rate averaged 7.72%. This unemployment rate is relatively high compared to other developed Western countries like United States and United Kingdom. Obviously, unemployment rate is a major growth indicator of an economy because a productive workforce has a critical role to play in the economic uplift of a country. In this context, it is really important to explore the root causes of high unemployment rate in Canada and thereby take appropriate measures to improve the scenario. In addition, it is identified that Canada has a liberal immigration policy that makes it easy for people worldwide to migrate to Canada for job purposes. According to official reports, the number of foreign immigrants admitted annually in Canada on a temporary basis has been growing fast over the last years (Thomas, Statistics Canada). Hence, this study will be helpful for foreign policymakers to identify how a liberal immigration policy can drastically impact employment rate of the country. In addition, this study can persuade authorities to think more seriously about the treatment of undocumented immigrant workers and admission of refugees from countries like Syria.
Unemployment Rate in Canada
While analyzing the historical unemployment rate of Canada, as already identified, the country’s average unemployment rate is 7.72 percent for the period 1966-2016. It is vital to note that in Canada, unemployment rate is measured as a percentage of the number of people actively looking for a job to the labor force. The country recorded an all-time high unemployment rate of 13.1 percent in December of 1982 whereas it achieved a record low rate of 2.9 percent in June of 1966 (Trading Economics). Being reported by the Statistics Canada, the country’s unemployment rate was 7.1 percent as of April 2016 (Trading Economics). The chart below (Fig.1) indicates how Canada’ unemployment rate changed over the last half century.
(Source: Trading Economics Canada)
While evaluating this chart, it is clear that Canada’s unemployment almost constantly increased during the period 1966-1980 in spite of some slight improvements. Over the following few years starting from 1981, the country witnessed record high unemployment rate in its history. During 1980s and 90s, the country’s unemployment rate was notably varying. For nearly last two decades, the Canadian government has been able to keep its unemployment rate below 8 percent except for a few years. However, the recent trends and forecasts point that the country’s unemployment rate is likely to increase over the coming years. The chart below (Fig.2) shows how the number of unemployed people in Canada changed over the period from January 2015 to April 2016.
(Source: Trading Economics Canada)
The graph clearly demonstrates that unemployment is a seriously growing issue in Canada. From the Fig.2, it is clear that the number of unemployed persons in Canada almost constantly grew over the period January 2015-April 2016, from 1.26 million in January 2015 to 1.38 million in April 2016. However, it is hopeful to see that the number of unemployed Canadian people notably dropped over the last two months.
Costs of High Unemployment Rate to the Canadian Economy
Unemployment is a dreadful issue for any economy because it has significant negative impacts on the stability of an economy in the long run. This issue not only affects the living standards of individuals but also the overall growth of an economy. Since Canada is an economically and industrially developed economy, the issue of unemployment can greatly hurt the competitiveness of the Canadian economy in a global market. The following part will discuss the short-term and long-term costs of high unemployment rate to the Canadian economy.
The impacts high unemployment rate on Canadian citizens is very obvious. When a Canadian citizen is unemployed, the situation will have immediate direct impacts on his living standards because his purchasing power will be diminished notably. In this circumstance, he will be forced to follow an economically-disciplined lifestyle and he may find it difficult to meet his daily living expenses. Although the effects of high unemployment rate on the Canadian economy are many times more severe, people are not much concerned about it because those effects are not immediately visible. When the unemployment rate of the country is mounting, the Canadian federal government is forced to spend heavily on unemployment benefits, food assistance, and healthcare. As a result, the government has a very limited amount of funds to spend on productive purposes such as infrastructure development, R&D, and military forces that set the foundation for a country’s sustainable economic development. At the same time, the Canadian government collects lesser levels of income taxes, and the situation in turn forces the government to borrow money or cut down its spending on productive endeavors.
It is alarming to see that a significant percent of the Canadian economic production goes to personal consumption and unemployed workers. It limits the government’s financial ability to implement big developmental projects. It appears that high unemployment rate reduces the GPD growth of the country because the overall size of the workforce available will be reduced when the number of unemployed people is growing. In addition, high unemployment rate has a toll on the business sector too. While analyzing the Canadian economy, it seems that unemployment benefits in the country are financed notably through imposing huge taxes on businesses. To illustrate, when the unemployment rate is high in the country, the federal government will try to meet its additional expenses through imposing taxes on the business sector and the scenario in turn would force companies to cut down their operating expenses by resizing the workforce. In other words, companies may fire employees or stop recruiting new candidates in an attempt to vie with increased government taxation. This will lead to further rise in unemployment. In Canada, companies operating in the energy sector have been following this strategy for years. Sal Guatieri, a senior economist at Bank of Montreal forecasts that Canada’s unemployment rate will remain stubbornly high as corporations in the country’s energy sector continue to cut jobs (Babad, 2016). The theory of classical unemployment can better explain this situation. According to this theoretical framework, “classical unemployment occurs when wages are too high for employers to be willing to hire more workers” (Speedy Publishing, Macroeconomics, 2014, p.na).Referring to this theory, high costs of hiring persuade employers to refrain from hiring activities, adding to the country’s unemployment rate.
According to a 2013 report released by TD Economics, the increase in youth unemployment in Canada during the global financial crisis 2008-09 would cause the Canadian youth to lose $23.1 billion in lost wages over the next 18 years (CBC News, 2013). Here, it is vital to note that this lost income ($23.1 billion) represents nearly 1.3 percent of the Canada’s GPD. The unemployment rate for Canadian youth (aged 15-24) mounted notably during the recent recession from 11 percent in July 2008 to 16.4 percent in July 2009. As of December 2012, the youth unemployment rate in Canada was 14.1 percent and the rate is yet to recover fully (CBC News, 2013). High unemployment rate indicates that a large number of youngsters are yet to be employed thus leading to lost wages. Wage scarring is another potential effect of youth unemployment on the Canadian economy. When an individual becomes unemployed at younger age, the situation can have far-reaching impacts on his career prospects. It is obvious that a long period of unemployment may persuade youngsters to take no work at all, and this situation would cost the country a significant loss of its workforce potential. To justify the argument, when an engineer finds it difficult to find a job in his profession for a long time, he may accept to work for a call center at low remuneration.
The lost production by those workers who are unable to find job contributes to a lower GDP growth of the country. “High unemployment tends to hurt growth in labor productivity and gross domestic product (GDP). It is also linked to higher rates of poverty, homelessness, income inequality, crime, poorer health outcomes, lower self-esteem, and social exclusion” (The Conference Board of Canada). It is evident that high unemployment rate adds to income inequality in the country, and this issue affects the economic growth adversely. According to an OECD study, income inequality and economic growth are negatively correlated (Sherman, 2014). Hence, the high unemployment rate in Canada fuels economic inequality in the country thus leading to a reduction in the economic growth of Canada. Since high unemployment rate results in poor health outcomes, the Canadian federal government would be forced to spend additionally on the healthcare sector. Undoubtedly, healthy population is a key pillar supporting the economy of any country, and therefore, poor patient outcomes would notably ruin the economic progress of Canada. Another significant cost of high unemployment rate to the Canadian economy is that this issue would increase crime rate of the country. To justify, when there is a growing number of people – particularly youngsters – remain unemployed, they are more likely to turn to illegal ways of making money. This situation would create serious law and order issues such as burglary and smuggling in the country.
While evaluating the detrimental impacts of high unemployment rate on the Canadian economy, it is vital to take hysteresis effect into account. In economics, hysteresis states that historical unemployment rate can have a significant negative influence on current and future unemployment rates. To illustrate, if people remain unemployed for a long time, they would be discouraged and lose on job training. In addition, it is really difficult for individuals to find a job after a long period of unemployment. As a result of the current high unemployment rate in the country, the Canadian federal government is struggling to implement new productive ventures that would create abundant new job opportunities. To sum up, the issue of high unemployment has far reaching consequences on the Canadian economy.
Personal Reflections
People from other countries like India and China are still migrating to Canada for job purposes while at the same time the number of unemployed Canadians is increasing in the country. To justify, studies indicate that the natural increase to the population accounts for only less than one-third of the Canada’s population growth. Migratory increase contributes to the remaining over two-third of the country’s population growth. From this, it is clear that actually there are enough job opportunities in Canada but the existing wage rates are too low for Canadians considering their high living standards. The current high rate of unemployment in Canada could be reduced notably if the Canadians take efforts to minimize their living expenses and accept the existing wage standards. Obviously, corporate companies in Canada play a crucial role in exacerbating the issue of high unemployment rate in the country. To illustrate, Canadian business houses rely extensively on immigrant workers who are willing to work for cheaper remuneration. For immigrants coming from third world and developing countries, even a below par remuneration getting paid in Canada will be attractive. When companies have easy access to such a potential but cheap alternative, they would not be interested to hire native Canadians at relatively higher costs. In addition to economic impacts, the issue of high unemployment rate also hurts the overall development of the society. Increased crime rate is a major social cost of higher unemployment. Studies suggest that higher level of unemployment and the resulting frustration and mental stress persuade people to engage in violence and other anti-social activities. Undoubtedly, such a social situation would limit the scope of peaceful living in the society.
Recommendations
A number of demand side as well as supply side policies may be pursued to fight the issue of high unemployment in Canada. Some thoughtful amendments in fiscal and monetary policy will make demand side policies to improve unemployment rate of the country. A properly structured fiscal policy can assist Canada to improve its unemployment rate by propelling aggregate demand and the rate of economic growth. An expansionary fiscal policy that promotes tax cuts and increased government spending is advisable for the Canadian government to enhance consumption and to increase aggregate demand. It is obvious that an increase in aggregate demand would require firms to produce more so as to meet the supply needs. This situation will force companies to hire more number of workers. In addition, a monetary policy characterized with lower interest rates is a good demand side strategy for the Canadian federal government to curb unemployment rate because this approach will reduce the cost of borrowing, and this favorable economic scenario may encourage people to spend and invest more. It is evident that the resulting surge in aggregate demand would fuel the GDP growth leading to a reduction in demand deficient unemployment. Supply side policies do not seek to boost aggregate demand but try to address imperfections in the labor market and to improve the unemployment caused by supply side factors (Grant & Vidler, 2000, p.169). One of the major supply side policies is to give the unemployed individuals proper education and training. This will help them acquire new skills and find good paying jobs in developing industries. In addition, it is good for the Canadian government to frame proper legal policies to reduce the power of trade unions that are able to bargain over wages unnecessarily and to create a situation of real wage unemployment. The federal government is also advised to improve the unemployment rate of the country by offering firms employment subsidies and by improving labor market flexibility. Finally, the government may also provide firms with tax concessions and thereby encourage them to set up new ventures in depressed areas.
Conclusion
References
Babad, M. (2016). BMO warns of stumbling Canadian economy, high unemployment. The Globe and Mail. Retrieved from http://www.theglobeandmail.com/report-on-business/top-business-stories/from-recession-to-modest-to-moderate-a-cross-canada-economic-outlook/article28647271/
CBC News. (Jan 29, 2003). Youth unemployment to cost Canadian economy $23 billion. Retrieved from http://www.cbc.ca/news/business/youth-unemployment-to-cost-canadian-economy-23-billion-1.1323533
The Conference Board of Canada. Unemployment rate. Retrieved from http://www.conferenceboard.ca/hcp/details/economy/unemployement-rate.aspx
Grant, S & Vidler, C. (2000). Economics in Context. Heinemann.
Sherman, E. (2014). Income Inequality Hurts Economic Growth. Retrieved from http://www.forbes.com/sites/eriksherman/2014/12/09/income-inequality-hurts-economic-growth/#6ba9e62b61d6
Speedy Publishing. (2014). Macroeconomics. US: Speedy Publishing.
Thomas, D. (n.d.). Foreign nationals working temporarily in Canada. Statistics Canada. Retrieved from http://www.statcan.gc.ca/pub/11-008-x/2010002/article/11166-eng.htm
Trading Economics. Canada Unemployment Rate. Retrieved from http://www.tradingeconomics.com/canada/unemployment-rate
