Explaining Canada’s superior employment rate

Donald Trump regularly makes outrageous claims. Fentanyl was pouring across the northern border from Canada and had to be stopped. Canada is nasty to deal with and has the highest tariffs in the world. Canada needs the U.S. but the U.S. doesn’t need Canada. Canadians want to become the 51st state. And so on.

In the latest trade dispute, after Mark Carney walked away from negotiations, Trump made a new claim that Canada’s unemployment rate was 10 per cent and climbing rapidly. Insofar as the unemployment rate is closely monitored, reported monthly, and given similar attention to the rates of inflation and economic growth, the comment was likely intended to signal Canada’s weakness. It fits Trump’s narrative that Canada needs the U.S. for its livelihood and protection and would be better off more directly under U.S. influence as a 51st state, or perhaps a protectorate like the Philippines or Panama in the past.

Fact checkers quickly reported that Canada’s unemployment rate is really 6.4 per cent for July, not 10 per cent, has fallen from 6.9 per cent in April, and is at its lowest rate since May 2024. Some astute observers pointed out that Canada’s method for the calculation of the unemployment rate leads to a higher rate than the U.S. by about one per cent. Under the American methodology, then, our unemployment rate would be 5.4 per cent, not that far off the U.S. July rate of 4.1 per cent.

Detection of unemployment is less straightforward that might appear, as it is sandwiched between the labour force statuses of employment and inactivity at a particular point in time. The internationally established standard for determination of unemployment is the notion of searching for work — you are unemployed if you do not have paid employment and you are looking for work without success. Surveys have been developed to categorize respondents as employed, unemployed or inactive, including the labour force survey (LFS) in Canada and the current population survey (CPS) in the U.S.

The LFS considers respondents to be unemployed if they did not work for pay or profit or were temporarily absent from their job or business during the reference week, if they were available for work if offers came, and if they also engaged in specified job-search activities. Those activities include placing or answering job advertisements, attending job interviews, registering at an employment exchange, checking at work sites, checking with friends or relatives about job opportunities, or taking steps to establish self-employment.

The survey also allows for passive search, such as simply looking at jobs available online or in newspapers; the American CPS does not consider this passive search ‘unemployment.’ Canada’s broader search criteria therefore lead to a higher unemployment rate. An article by Constance Sorrentino in the U.S. Monthly Labor Review in 2000 estimated the difference to be a little less than one per cent. Since other differences in the surveys, such as the inclusion of 15-year-olds in the LFS but not in the CPS, have only minor impact on unemployment calculations, a difference of about one per cent seems appropriate.

It is not difficult to think, however, that the difference might change over time and with changing economic conditions. Sorrentino found the impact of the inclusion of passive search in the LFS was quite small in the 1980s but became significant in the 1990s. This might reflect the penetration of new technology, particularly the internet, which provided a fresh vehicle for job ads and for passive scrolling that would count as unemployment activity in Canada but not the U.S.

As workers become discouraged by economic conditions, they may switch from active search to passive search, keeping one eye on the labour market without directly seeking, or being able to seek, employment opportunities.

Some of this activity may still be captured as unemployment in Canada, increasing the gap with the U.S. This so-called ‘discouraged worker effect’ was noticeable during the recession arising from the financial crisis of 2008, particularly for young workers, as the unemployment rate jumped from six per cent to almost nine per cent in 2010.

Because the distinction between unemployment and inactivity is complex, many economists like to look at the employment rate (the ratio of employed to population), rather than the unemployment rate (the ratio of unemployed to employed plus unemployed) as a simpler alternative indicator of labour market health. In that regard, Canada’s employment rate stands at 60.9 per cent as of July, while the U.S. rate has fallen to 58.9 per cent, its lowest rate since September 2020.

While there are also survey issues with the identification of employment that we do not have space to discuss here, they are viewed as less serious than the issues surrounding identification of unemployment.

So, perhaps our superior employment rate to that of the U.S. is indicative of underlying strength in the Canadian labour market that our higher unemployment rate conceals.

Wayne Simpson is professor emeritus of economics at the University of Manitoba.