The Relationship between Unemployment Rate and Economic Growth across Canada

Among the ten provinces of Canada, Quebec showed the highest unemployment rate, in April 2020 (17 %). In January and February, the province of Quebec along with Manitoba and British Columbia recorded the lowest unemployment rate in Canada. In February 2020, the level of the unemployment rate in Quebec was 4.5 %, the lowest since 1976. The extent of the spread of the COVID-19 explains the high unemployment rate in Quebec. As a matter of fact, Quebec accounts for more than half of the confirmed cases of COVID-19 in Canada (44 197 cases out of 79 502, as of May 20). Most of these cases (about half) are in the region of Montreal that generates the third of Quebec's gross domestic product (GDP).

In the Prairie Provinces (i.e. Manitoba, Saskatchewan, and Alberta), the unemployment rates in April 2020 nearly doubled, compared to their historical averages (see Figure 1). For example, in Alberta, the unemployment rate was 13.4 % in April, versus an historical average of 6.4 %. In April, the unemployment rate in Alberta was the highest in the Prairies and also a record high in the history of this province.

Figure 1: Unemployment Rates across Canada.

The picture of the situation is different in Atlantic Canada (i.e. Newfoundland and Labrador, Prince Edward Island, Nova Scotia, and New Brunswick). In Newfoundland and Labrador, the unemployment rate in April 2020 (15.9 %) was very close to its historical average (16 %). This reminds that unemployment rate has often been very high in this province. (See my blogpost Unemployment Rate in Newfoundland and Labrador.) Prince Edward Island is the only province in Canada where the unemployment rate during the outbreak of COVID-19 has been lower than the historical average. As of May 20, only 27 cases of COVID-19 have been found in this province.

Throughout Canada, three economic sectors have been mainly affected by the lockdown restrictions: (1) accommodation and food services, (2) construction, (3) forestry, fishing, mining, quarrying, oil and gas. In the sector of accommodation and food services, between January and April 2020, the unemployment rate rose from 9 % to 44.7 % in Quebec, from 2 % to 30.9 % in Manitoba, from 4.7 % to 35 % in Saskatchewan, and from 5.9 % to 38.9 % in British Columbia.

In the sector of forestry, fishing, mining, quarrying, oil and gas, between January and April 2020, the unemployment rate rose from 8.7 % to 27.9 %, in Quebec. In the construction sector, while in Quebec the unemployment rate rose from 11.3 % in January to 40.3 % in April, it only rose from 5.4 % to 14 %, in Ontario.

In a previous post [here], I have used the Okun's law to predict GDP growth from changes in unemployment rates using data for Canada as a whole. In this post, I take things a bit further by estimating the Okun's law using instead data of the ten provinces (panel data). I have kept the short-run effect of unemployment on real GDP unchanged across the provinces and allow for heterogeneity only in the intercept. (This is referred to as a least squares dummy variable model, in econometrics.)

Figure 2 shows as scatter plot the changes in the annual unemployment rates and the corresponding GDP growth rates in the ten provinces, between 1981 and 2018. The blue line in this figure represents the predictions from the Okun's law. The estimate of the short-run effect of unemployment on real GDP is -1.45, which means a 1 percentage point increase in unemployment rate causes a 1.45 % decrease in real GDP. This estimate is close to the one obtained previously using aggregate data for Canada (-1.4). But, the explanatory power of this panel data model is much higher. It explains 58.5 % of the variability in the data versus 35 % for the model that uses aggregate Canadian data.

Figure 2: Okun's Law: Percentage Point Change in Unemployment Rate and Real GDP Growth Rate, Canadian Provinces, 1981-2018.

The table below reports the predictions of the real GDP growth rates for the ten provinces for the first quarter of 2020 and April 2020.

Table: Predictions of real GDP Growth Rates for the Provinces of Canada based on a Panel Data Model.

Province	First Quarter of 2020	April 2020
Newfoundland and Labrador (NL)	1.4 %	-4.1 %
Prince Edward Island (PE)	2.3 %	-.9 %
Nova Scotia (NS)	1.6 %	-2.6 %
New Brunswick (NB)	1.9 %	-4.7 %
Quebec (QC)	.9 %	-11.2 %
Ontario (ON)	1.5 %	-2.8 %
Manitoba (MB)	1.8 %	-5.2 %
Saskatchewan (SK)	.7 %	-3.7 %
Alberta (AB)	1.9 %	-3.8 %
British Columbia (BC)	1.5 %	-3.8 %

The Okun's model that uses panel data predicts a positive real GDP growth across Canada for the first quarter of 2020. This contrasts with the predictions I made previously using the aggregate Canadian data. On the other hand, it predicts negative growth rates across Canada for April 2020. However, it is worth pointing that these forecasts do not take into account the effects of the various economic stimulus programs initiated by the federal and the provincial governments in response to COVID-19.

Dataset and Code

Is Canada in Recession?(continued)

For a second time, quarterly gross domestic product (GDP) fell in Canada. Its growth rate was -.1% the first quarter and -.3% the second quarter of this year. Does it mean Canada is in recession since, basically, a recession is defined as a period of  at least  two consecutive falls in quarterly GDP? I still doubt it! [here]

A look at monthly data shows that GDP grew by .5% in June. This is well above its average monthly growth rate, which is .21%. This high growth rate was actually expected since, as we knew in advance, unemployment rate in June, 6.5%, was below its seasonal average.

GDP, seasonally adjusted, Canada, 1997:M1-2015:M6

What the third quarter of the year will be like? Information available now to make predictions is: unemployment and inflation rates. Unemployment rate rose to 7.1% in July. But there is nothing worrying about this since it is still below its seasonal average and it will probably fall again by September.   Consumer prices also rose by .2% in July, which is a sign that the final domestic demand is increasing. 

The data used are available here.

Economic Growth across the World

Many economic and political events that took place over the past decades contributed to creating or destroying wealth across the globe. The wealth created by a country is measured by its gross domestic product (GDP). I here point out some of the major events that significantly shifted the distribution of GDP growth across countries.

The Distribution of Annual Average Growth across the World

The Period 1990-94 

This period was marked by the dissolution of the Soviet Union, the first Gulf war, and civil wars in Africa. Many countries thus experienced large declines in GDP. The above figure reveals that GDP growth distribution across countries for the period 1990-94 is the only one to be left-tailed.  

After their independence in 1991, many post-Soviet countries such as Albania, Armenia, Azerbaijan, Georgia, Kazakhstan, and Latvia experienced social unrest, war, and economic crises. In 1992, growth rates, for instance, in Georgia and Armenia were respectively -44.9% and -41.8 %. Cuba, a trading partner of the Soviet Union, also severely suffered from its dissolution. Its GDP fell by 7.9 %, on average. In the same time, in many other countries such as Mongolia, Mauritania and Togo where people started fighting for democracy, economic activity went down due to strikes and social unrest. In Mauritania, GDP fell by 39.9 % in 1992. In Togo, it fell by 15.1 % in 1993.  

GDP fell by more than one-half in African countries such as Liberia in 1990 and Rwanda in 1994 due to civil wars.  

During the first Gulf war, oil price rose due to the disruption of its supply from Iraq and Kuwait. Oil supply from the Soviet Union, a major oil producer, was also disrupted after its dissolution. This fueled inflation in developed countries. Tightening monetary policies aiming at fighting inflation slowed down economic activity and led to recession.  

Few countries experienced sustainable growth over 1990-94. Among the economies that performed well, one could include: Chile (7.33 % on average), East Asian countries such as China (10.8 %) and South Korea (7.98 %), and Southeast Asian countries such as Malaysia (9.31 %), Singapore (9.26 %), and Thailand (9.01 %). Lebanon recovering from the civil war of 1975-90 grew by 16.8% on average.  

The Period 1995-99 

The distribution of GDP growth across countries is more peaked because of the favorable economic conditions.

Economic disasters slowed down over the period 1995-99. A part from Kazakhstan, Moldavia and Ukraine, most post-Soviet economies started growing thanks to foreign investment.

Countries such as Bosnia-Herzegovina, Liberia, and Rwanda recovering from war experienced respectively average growth rates of 33.9 %, 33.4 %, and 15.7 %.

Equatorial Guinea which became the third oil producer in Sub-Saharan Africa grew by 56.7 % on average. The promotion of the market economy and the attraction of foreign investment in Cape Verde prove successful. This country grew by 12.1 % on average.

During this prosperous period that was characterized by the information technology (IT) bubble, the average growth rate more than doubled in Canada and the United Kingdom. It almost doubled in Australia and the United States.

The late 1990s also saw European Union (EU) member States complying with the euro convergence criteria and, in 1999, the official launching of the euro alongside their national currencies. Most of these countries ended up with higher growth rates. The average growth rates more than doubled in Finland, Spain, and Ireland. The Irish   miracle was in part based on policy measures such as the low tax rate aiming at attracting foreign investment.

This period was negatively marked by the East Asia financial crisis that slowed down growth in this region.  

The Period 2000-04 

The early 2000s witnessed the beginning of the enlargement of the EU to East European countries and the end of the IT bubble.  Growth over this period was moderate and its distribution across countries was less sharp than in the previous period.

In 2002, the euro became the single currency of twelve European States. Converting prices from their national currencies into the euro occasions inflation. Except Greece, Spain, and the Netherlands, these economies slowed down. The IT bubble burst in the same time.

Some East European countries joined the EU in 2004 and hosted a lot of foreign investment. Average growth rate in Estonia, Latvia, and Lithuania was about 7 % on average.

Post-Soviet countries such as Armenia, Azerbaijan, and Kazakhstan grew by 10 % on average thanks to free market, foreign investment and international aid.

Growth slowed down in Equatorial Guinea but the country still showed the highest record of the period (30.6 % on average). Nigeria, another major oil producer in Africa, grew by 11.52 %.

Zimbabwe showed the worst record (-6.66 % on average) due to its mismanagement and international sanctions.

The Period 2005-09 

The Great Recession undermines growth in the EU and in North America. This recession stemmed from the burst of a housing bubble and a speculation on commodity prices.  

The economic situation was beneficial to oil producing countries such as Azerbaijan, Qatar, and Angola that showed the highest average growth rates, 21.2 %, 16.3 %, and 15.6 % respectively.

The Period 2010-13

This period witnessed the European debt crisis. It became impossible for Cyprus, Greece, Ireland, Portugal, and Spain to repay or refinance their debts. Greece had one of the lowest average growth rates (-6.05 %).

Macao and Mongolia showed the highest average growth rates: respectively 17.5 % and 12 % on average. The distribution of growth across countries is flatter than the others. 

The Fall in Oil Price and Economic Growth

The fall in the price of oil will slow down growth in Canada through a decrease in business investment.

While consumers are enjoying the fall in the price of oil, federal and provincial governments are worrying about its negative impacts on their finance. Finance Minister Joe Oliver struggling to balance as promised the federal budget had no choice than postponing its announcement until April at the earliest [here]. In Alberta, the largest oil producer in Canada, the fall in oil price turned the budget surplus the province projected this year into a $500 million deficit [here].

The fall in the price of oil decreases the price of gasoline. This raises consumer surplus, increases the use of cars and consequently the consumption of gasoline. The induced increase in households’ mobility raises their propensity to consume: eating out, shopping...

The first panel of the figure below shows the evolution of the average propensity to consume along with that of the consumer price index (CPI) of gasoline.   The average propensity to consume is the ratio of households’ final consumption expenditure to their income. I have used gross domestic product (GDP) as a proxy for households’ income. 

Average Propensity to Consume, Investment Intensity, and CPI of Gasoline, Canada, 1981:Q1-2014:Q3

Growth in the average propensity to consume is negatively correlated with growth in the CPI of gasoline. The correlation coefficient between the two growth rates is -.011.

Only consumers benefit from a fall in the price of oil. Businesses and governments incur losses.  

Growth in investment intensity is positively correlated with growth in the CPI of gasoline (.16). Investment intensity is the share of business investment in GDP. A fall in the price of oil reduces the profit margin, increases uncertainty, and discourages new investment in the oil industry. To understand the importance of the oil industry in Canada, note that in provinces such as Alberta and Saskatchewan oil and gas extraction represented an average of 28 % and 18% of their respective annual GDP between 1997 and 2013. To these two shares, one can add the support activities for oil and gas extraction, which represent about 2% of the GDP of these provinces. Across Canada, oil and gas extraction represents on average 6% of GDP.

As far as federal and provincial governments are concerned, the correlation coefficient between their general revenue as a share of GDP and the CPI of gasoline is .23. 

So what could stimulate the economy given this expected slowdown? Bank of Canada’s decision on January 21^st to cut its key rate from one percent to .75% could stimulate investment and further increase households’ consumption.

Slowdown of the Canadian Economy over the First Quarter of 2014

The slowdown of the US economy has affected Canada.

The Canadian economy performed well last year with real gross domestic product (GDP) growth rate rising continuously from .22 % at the end of 2012 to reach .81 % at the end of last year. This year, growth has slowed down. Real GDP growth rate fell to .33 %. However, that is better than the United States where growth rate was -.25 % and worse than the United Kingdom that experienced a growth rate of .81 % the first quarter of this year. 

Figure 1: Real GDP Growth Rate, Canada, United States (US), and the United Kingdom (UK), 1981:Q1-2014:Q1, Data Sources: Statistics Canada (Canada), Federal Reserve Bank of St Louis (US), Office for National Statistics (UK)

As one could see in the figure below, the slowdown in Canada’s GDP growth comes from the slowdown in household final consumption growth and the fall in both business investment and exports. 

Figure 2: Growth Rate of GDP Components, Canada, 2013:Q1-2014:Q1, Data Source: Statistics Canada

Real household final consumption growth rate fell by half between the last quarter of 2013 and the first quarter of 2014. It went down from .6 % to .3 %. This may be attributable to the rise in the cost of living. As a matter of fact, Canada experienced a .9 % inflation over the first quarter of this year.

Canada’s imports fell by 2.1 % due to the depreciation of our currency. At the beginning of the quarter, one Canadian dollar was worth US$ .94 and £ .57. At the end of the quarter, the Canadian dollar fell to US$ .9 and £ .54. Imports fell because it became more expensive for Canadian to purchase items made abroad. In the same time, Canadian exports were expected to rise because items made in Canada became cheaper abroad but they fell instead by .8%.

Figure 3: One Canadian Dollar in terms of the US Dollar and the Pound Sterling, Jan 2 to Mar 31, 2014, Data Source: Bank of Canada

The fall in our exports in spite of the depreciation of our currency has to do with the poor performance of the US economy, our main trading partner. 

Quebec Got a New Prime Minister

Mr. Philippe Couillard has become the 31^st prime minister of Quebec following the general election of April 7. His party, the Liberal Party of Quebec, has won 70 of the 125 seats in the parliament. The Quebecois Party (PQ) only won 30 seats, which made the minority government of Mrs. Pauline Marois the shortest in Quebec’s history.

The defeat of the PQ and that of its leader, Mrs. Marois, in her constituency of Charlevoix-Côte-de-Beaupré are explained by the fact that the themes tagged to her party during the election campaign, namely the charter of values and the referendum on the sovereignty of Quebec, were far away from the daily concerns of the population of the province exhibiting the lowest growth rate in Canada.

To come to power eighteen months ago, the PQ was closer to the worries of the population of Quebec when it campaigned to put an end to the student protest against the rise in tuition, to abolish the health tax, and to impose a total moratorium on the prospection and extraction of shale gas.  

Figure: Average Growth Rate and Average Share of Provinces and Territories in Canada’s Gross Domestic Product (GDP), NL: Newfoundland & Labrador, PE: Prince Edward Island, NS: Nova Scotia, NB: New Brunswick, QC: Quebec, ON: Ontario, MB: Manitoba, SK: Saskatchewan, AB: Alberta, BC: British Columbia, YT: Yukon (1981-2012), NT: Northwest Territories, NU: Nunavut (1999-2012), Data Source: Statistics Canada

The new liberal government has now to get down to stimulating Quebec’s economy. As you could see on the above figure, Quebec is the second economy of Canada after Ontario. Quebec generates,  on average, 20.83 % of Canada’s wealth but its average growth rate, which is 1.97 %, is the lowest.
This weak growth rate is attributable—to use a rather simple expression— to the exhaustion of our economy. You can observe on the above figure that the economies of the territories of Nunavut and Yukon exhibit the highest growth rates, 4.16 % and 3.82 % respectively, due to their freshness.
Like the province of Ontario, the rejuvenation and revitalization program Quebec needs is to foster the creation and expansion of small of medium size companies and support innovation within these businesses.