Trudeau government should pivot away from Morneau-era policies of weakness

In touting Bill Morneau’s tenure as federal finance minister, which ended recently with his resignation, the Trudeau government repeatedly pointed to Canada’s low unemployment rate (pre-recession). But the interesting question, and one ultimately linked with the minister’s legacy, is how the country achieved a low unemployment rate while other key economic indicators were distinctly weak.

For example, per-person GDP—the total value of all goods and services produced in Canada in a particular year, adjusted for population and inflation—grew  by 2.3 per cent between 2014 and 2018 compared to 4.9 per cent between 2004 to 2008, before the last recession. And the growth in individual and family income during the Trudeau government’s first mandate were half (or less) the rate during the pre-2009 period.

Business investment, which is normally linked with employment, also collapsed. Specifically, investment in machinery, equipment, factories, intellectual property and other assets (excluding residential housing) declined by 17.3 per cent between 2015 and 2019. Notably, this trend was not limited to the energy sector as two-thirds of industries experienced declines. During the comparable period pre-2009 recession, however, business investment grew by 42.1 per cent.

So how do we explain historically low unemployment rates in the face of weak economic and income growth, and major declines in business investment?

To understand what’s happening, it’s important to understand how the unemployment rate is calculated. The unemployment rate represents the number of people looking for work but unable to secure employment during a specific period (usually one month) expressed as a share of the labour force. The last part of the definition is key—labour force, which is calculated as the number of people over age 15 who were either employed or unemployed.

This is important because the share of the working age population (15 to 64) active in the labour market, referred to as the participation rate, has been declining as our population ages. Put differently, since 2008, the share of Canada’s working-age population that has participated in the labour market has declined from 67.6 per cent to 65.7 per cent. So part of the explanation for the lower unemployment rate is that less people (or a smaller percentage) of the population are actively working or looking for work.

A second factor to consider is the mix of employment between the private and government sectors. Consider that any position in the government sector must be financed by taxes or borrowing (deferred taxes) by the private sector. This is important because despite half the provinces and the federal government running deficits from 2015 to 2019, public-sector employment increased by more than 300,000 people. Indeed, of the total 300,000 increase, almost 60 per cent (from federal, provincial and local governments) was in provinces with deficits.

Subsequently, if you adjust the unemployment rate for the falling participation rate, and had the growth in government-sector employment been constrained to population growth, the average unemployment rate during the 2015-2019 period would have been 8.7 per cent—almost 40 per cent higher than the actual rate.

Put simply, lower labour force participation coupled with increased government-sector employment (which was exclusively financed by deficits in Ottawa and provincial capitals such as Edmonton and Toronto) helps explains, by a significant measure, the country’s low unemployment rate during the 2015 to 2019 period.

Lower economic and income growth, collapsed business investment, and a lower unemployment rate fuelled by deficit-financed government employment coupled with fewer people in the labour market—that’s not an economic legacy worth remembering or continuing. Unfortunately, the Trudeau government will likely continue with these failed policies rather than return to the successful policies of the Chretien-Martin-Harper era.