Tuesday, March 11, 2014

Why are Canadians Working So Much More Than Americans?

If we track real GDP in the United States and Canada since the beginning of the last recession, the history looks similar.
I have normalized real GDP to 100 for each country in 2007Q4. You can see that the recession proceeded in similar ways, with Canada coming out a bit better. Real GDP was 1.4% higher in Canada in 2013Q4 relative to the U.S, as compared to 2007Q4. However in per capita terms, the U.S. did a bit better than Canada, as population growth 2007-2014 was more then two percentage points higher in Canada than in the U.S. (due to higher immigration).

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.
As you can see, from the early 1980s until 2007, the unemployment rate was substantially higher in Canada than in the U.S. - at times by as much as four percentage points. But during the recession, Canada and the U.S. reversed roles. From trough to peak, the unemployment rate increased about six points in the U.S., and by about three points in Canada. During the recession, the unemployment rate was higher in the U.S., and unemployment rates are currently about the same in the two countries.

Next, let's look at aggregate employment/population ratios.
Here, you can see that employment/population ratios were similar in Canada and the U.S. before the recession, but the ratio dropped about two percentage points in Canada, and about four in the U.S. Currently, adjusting for the size of the working age population, the number of workers is close to 5% higher in Canada than in the U.S. That's a big number.

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.
So, just as in Olympic hockey, the Canadian men and women are both outdoing their U.S. counterparts. Interestingly, the current gap is much larger for women than for men. And, if we look at the whole time series, we can see similar patterns in the early 1990s episode and the recent recession. In the early 1990s, there is a large decline in employment in Canada, but the drop is larger for men than for women. And in the recent recession, the employment decline for men is larger than for women in the U.S. Note that this is also true for Canada. During the last recession, the employment/population ratio declined for men, but was roughly flat for women.

Finally, we'll look at the cross-country differences by age, with 15-24 first.
(Note here that I'm using annual data instead of monthly as in the previous charts. This is just what I could easily get access to). For the young, the difference between Canada and the U.S. is currently huge. Before 1980, both countries look about the same, then employment falls for the 15-24 group in Canada, but remains stable in the U.S. However, after 2000 there is a precipitous decline in youth employment in the U.S. There is a decrease in employment in Canada in this group during the last recession, but the decline is much larger in the U.S.

Next are the prime-age workers, aged 25-54.
Here again, the current difference between employment in Canada and the U.S. is huge, though not as great as the difference for 15-24. Something that shows up quite clearly in this chart is the secular decline in the U.S. employment/population ratio that begins about 2000. This secular decline is interrupted by a period of growth that corresponds roughly to the U.S. housing boom.

Finally, the old geezers (including yours truly), aged 55-64.
(Here we're back to monthly data, but with shorter time series, starting in 1995 instead of 1976). In this age group, you see only a small decline in employment in the U.S., and the recession is not even discernible in the Canadian data. But, what was a large employment gap between the U.S. and Canada in 1995 has declined to essentially zero.

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.


  1. "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." You might want to think again about using life expectancy (sans adjustment for important non-health-system factors) to measure quality of service. See, for example:


    "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." As described here (in central bank talk - not in a quantitatively rigorous analysis), the early 1990s was a period of significant "restructuring" for Canadian businesses as the Bank of Canada pursued a disinflationary policy and the federal and provincial governments carried out major fiscal adjustment:


    Perhaps this stuff mattered for the behavior of the employment/population ratio in the 1990s.

    1. 1. For this blog post, I just wanted a few summary numbers. However, given all the evidence I have seen, I think one can make the case that, if you slice the population any way you want (by income, race, whatever) and make the comparison between Canadians and Americans, the Canadians are at least as healthy as the Americans.

      2. The timing is wrong for these policies to have caused the drop in employment in Canada. The drop in employment begins in 1990. Inflation targeting starts in 1991, and the disinflation that follows is not that large, for example compared to the Volcker disinflation. The deficit reduction program in Canada doesn't start until 1995, when employment has bottomed out and started to increase.

  2. One implication is that productivity growth may have been lower in Canada post-recovery (i.e. similar gdp growth but with more emp/pop to produce it).

    This makes me wonder about the U.S. gdp series. A large percentage, I believe, is imputed, including that of the financial sector. The larger percentage of health care gdp may also be harder to measure.

    Could it be that the counter-cyclical behavior of productivity growth in the U.S. was partly a statistical mirage?

    1. "Could it be that the counter-cyclical behavior of productivity growth in the U.S. was partly a statistical mirage?"

      That's what McGrattan and Prescott claim:


  3. Ed Prescott or was it Rogerson spend time showing the high labour supply in Europe in the 1970s despite high taxes was partly due to the much lower per capita incomes in Europe.

    Canadians are 20% poorer than americans.

    1. Do you have a source on the 20% poorer figure?

    2. I didn't think so either, but if you check the Penn World Tables, that's correct. Given the PWT PPP calculation, the difference in 2011 is about 20%. If you make the comparison given current exchange rates, the difference is much smaller, but prices are higher in Canada. I think the income difference has probably remained about the same over a long period of time, but the tax burden in Canada relative to the U.S. may have decreased since the 1990s. The tax picture is quite complicated. Canada has a value-added tax, so that doesn't distort labor supply as much for high income people. But Canada has higher marginal income tax rates for the high income people. Canada also has no mortgage interest deduction.

  4. These comparisons are always nonsense. Canada is a tenth the size of the U.S. It is always rich in natural resources. Try comparing Canada and Texas. Much of this disparity will likely disappear.

    1. I think you mean Alberta and Texas. Ontario is more like Michigan, though Toronto is something like New York. British Columbia and Washington state are more alike than Texas and Michigan. The national comparison is not nonsense at all. The U.S. is actually quite rich in natural resources, and Canada is not all about mining gold, extracting oil and natural gas, and chopping trees.

  5. I would argue that Canada has benefited from large positive shocks in other sectors that may have offset the negative shocks to the construction sector. Specifically, higher oil prices and new technology increased the value of a main resource, the Canadian oilsands. Their exploitation has contributed to an increase in public as well as private revenue.

    1. Where are commodity prices now relative to the beginning of the recession?

    2. They are somewhat lower now, but they are still high by historical standards, following a sharph increase in early 2000s, at around the same time the Canadian employment graphs cross with the US graphs. Also, prices are just one component. Perhaps the most important is technological innovation in the 1980s and 1990s that brought down the cost of extraction (e.g. the development of support systems for the Steam-Assisted Gravity Drainage method).

    3. In any case, the aggregate real GDP path looks similar, but the labor market looks different. And that could be due to sectoral issues - there's something different going on in Canada and the U.S. with regard to changes in the sectoral composition of output that has made the labor markets in the two countries behave differently.

    4. Yes, that's what I think!

  6. I thought the work Mian and Sufi showed it was related to aggregate demand, which you dismiss. Even within the US, regional shocks have a large impact. So it does not surprise me that the USA and Canada are not integrated.

    1. Actually this is interesting. I am on the road and writing from my cell so I couldn't read the paper. But from the abstract they seem to break down the impact to labor in the tradable and the non-tradable sectors and do find a significant difference. So I am not sure how they can talk about aggregate demand when dissagregation clearly matters.

  7. I like the explanation based on Obamacare delinking access to insurance from employment. We do need more evidence as you suggest based on relative wage rates. However, you do not consider the changes in unemployment benefits after the recession in US-something what Mulligan has been arguing. I think these two factors combined make a good candidate for explaining the relative behavior of employment/population ratio in North America, especially if Canada did not see similar changes in post recession unemployment benefits.

  8. "immigration policy is very different"

    Yes. Over time that adds up. Check out PISA test scores for immigrants in Canada v. U.S.

  9. This may not be as important for trend analysis, but does this post account for the fact that Canadian unemployment numbers are calculated using a different methodology than are US ones? To compare to the US, one needs to use Canada's R3 measure, rather than R4. http://www5.statcan.gc.ca/cansim/a05?lang=eng&id=2820085#F2

  10. The housing market in Canada did not experience as much of a loss as the American housing bubble so that can be a way to explain the differences in employment. However, a few decades ago when the baby boom generation entered the labor force it gave the U.S economy a boost that they had lost during the recession and they needed to get that back. The fed had hoped that the different series of quantitative easing will put the labor market in the right direction and it has, given the millions of jobs that have been created as a result.