If we track real GDP in the United States and Canada since the beginning of the last recession, the history looks similar.
But labor market conditions in Canada and the U.S. look very different, as David Andolfatto has pointed out. I'm going to use those differences to help sort out some of the issues raised by John Cochrane regarding the behavior of the employment/population ratio in the United States.
Though I want to focus on employment, it's useful to look first at unemployment rates in Canada and the U.S., to see some of the important differences.
Next, let's look at aggregate employment/population ratios.
If we look at the whole time series in the last chart, there are some interesting things going on. In particular, before 1990, the behavior of employment/population ratios in the two countries was similar, with employment a little higher in the U.S. Then, in the early 1990s, Canada experienced a drop in the employment/population ratio of a similar magnitude to what occurred in the U.S. in the last recession. Indeed, we can just reverse the labels for post-1990 and post-2007, and the behavior looks much the same. In the early episode there is a small decline in the U.S. and a big one in Canada, and the opposite occurs in the later episode. A key point here is that large and persistent declines in employment are nothing new for rich countries, and need not have anything to do with financial crises.
Next, I'll show you the differences in behavior by gender.
Finally, we'll look at the cross-country differences by age, with 15-24 first.
Next are the prime-age workers, aged 25-54.
Finally, the old geezers (including yours truly), aged 55-64.
It's important to understand what is driving the trend increase in the employment rate of older workers in Canada. That's due primarily to the changing behavior of older women over time. The labor force participation rates of younger women have increased on trend since Word War II in Canada. Thus as these women move through the age cohorts, average labor force participation has increased over time. In the sample depicted in the last chart, baby boom women, who have higher labor force participation than older cohorts, are accounting for an increasing larger fraction of the 55-64 group.
People are trying to get a grip on what caused the dramatic decrease in the employment-population ratio in the U.S. during the last recession, and why that ratio has shown little increase since the recession ended. So, in light of what we have learned from the above charts, let's run through some possible explanations.
1. Aggregate demand is persistently low. In hardcore Keynesian thinking, real GDP is demand-determined. Thus, the path of real GDP is determined by aggregate demand. But, look at the first chart. In the hardcore Keynesian mind, aggregate demand has been roughly the same (adjusting for population growth) in Canada and the U.S. since the beginning of the last recession. The North American economy is highly-integrated. Yet, what we see in the third chart is a difference of about 5% in employment between Canada and the U.S. So, I'm going to dismiss this explanation as a non-starter.
2. Taxation. As Noah Smith points out, it seems this should go the other way. Apparently marginal income tax rates are higher in Canada than in the U.S., so according to Ed Prescott, maybe Americans should be working harder than Canadians. But, perhaps we should expand our notion of what "taxation" is. In Canada, there is socialized medicine, financed through the tax system. In the U.S. - at least until Obamacare came into effect - most Americans were getting health care through private insurance provided as a benefit of employment. But from my point of view, the way I pay for health care looks just like a tax. When I lived in Canada, my federal and provincial income taxes would be withheld from my paycheck. In the U.S., my health insurance premium is a before-tax deduction from my paycheck.
So, suppose I think of the resource cost of health care in the U.S. as being like a tax. From the World Bank, in 2011 Canadian taxes were supporting health care expenditures of 11.2% of GDP, while U.S. "taxes" were supporting expenditures of 17.9% of GDP. So, I think if we did the calculation, we would find a substantially higher "tax" burden in the U.S. than in Canada. In the U.S., health care is a substantial inefficiency burden on the U.S. economy. The World Health Organization tells us that Canada is #12 in the world on the life expectancy scale (80.4 for men; 84.6 for women), while the U.S. is #35 (77.4 for men; 82.2 for women). For the U.S., this is much like having a larger government that delivers a lower quality of service.
But how does inefficient health care delivery affect labor supply decisions in the U.S.? First, consider pre-Obamacare arrangements. Paying a health insurance premium through my employer is like paying a tax, but I only get the benefit if I'm working. Thus, on net, the way health care was financed in the U.S. may have served to increase employment relative to Canada. As well, the tax was lump-sum, conditional on working, so it didn't affect my choice of hours of work - the intensive margin. Indeed, the negative wealth effect would tend to make me work harder. Post-Obamacare, it's a different story. Now, I get the healthcare benefit whether I work or not, which looks more like Canada. So, this should reduce labor supply by discouraging labor force participation - the extensive margin.
The direct effects of health care inefficiencies seem not to help us in explaining employment differences in Canada and the U.S., unless perhaps those inefficiencies are reflected in relative wages, which in turn affect labor supply. For example, protection for the health care sector (monopoly power; patent protection for drug manufacturers, for example), tends to inefficiently allocate capital in the economy toward the health care sector. This makes wages lower than they would otherwise be outside of the health care sector, which reduces non-health care labor supply, and health care labor supply is constrained by the medical profession. I am not aware of any work that measures this kind of effect.
3. Demography. This paper by Kapon and Tracy at the New York Fed suggests that the decline in the employment/population ratio in the U.S. could be explained by demographics. As the population ages, on average, labor supply declines. The problem with that idea is that the age structure of the population in Canada and the U.S. is very similar. Since World War II, fertility rates in Canada and the U.S. have been roughly the same. There are differences in immigration, certainly - Canada admits more immigrants, and its immigration policy is very different - but that's not going to explain the differences in behavior post-2000 in the two countries.
4. The Financial Crisis. Canada experienced only a mild decline in housing prices and residential construction during the recent recession. Thus, though we see a similar decline in real GDP in the two countries, the differences in sectoral composition of output could be important for the labor market. There also may have been greater dispersion in the decline in aggregate activity within the U.S. as opposed to within Canada during the recession. You may not think residential construction is a large enough sector to account for the differences in employment, but if we consider all the ancillary sectors - consumer durables and services, for example - related to housing, the effects could be large in the labor market.
4. Pre-Crisis Sectoral Issues. First, it would be useful to know what caused the large drop in the employment/population ratio in Canada post-1990 (see the third chart). That might give us some clues. Second, one possible story about the U.S., post-2000, is that there was an important secular sectoral shift that commences around 2000, but was masked by the post-2000 housing boom, which was essentially construction under false pretenses. If the sectoral shift is what was driving what we see in the time series, it had to affect men more than women, the old not at all, prime age workers somewhat, and young workers a lot. This also must have been a sectoral shift that affected the U.S., but not Canada.
I'm not sure where this leaves us. As John Cochrane says, you can't work all of this out in blog posts.