Has Canada reached the exact sweet spot for unemployment? Probably not

Economists tease sociologists for believing that “data is the plural of anecdote.” In fact, many sociologists are every bit as empirical as economists. And anecdotes can be revealing. So-called “casual empiricism” just means walking around with your eyes open, as economics Nobelist Robert Lucas once put it.

The anecdote stoking this train of thought is from a young acquaintance seeking advice on how to ask his boss for a raise. A couple of years ago, when the labour market was much slacker, I might have said: “Don’t ask!” But the market is stronger today so I had to confess I was never very good at asking for raises and, besides, at my university there was a regular merit review with clear guidelines on what would get you an increase. There was also what I take to be the economy-wide rule, maybe the cosmos-wide rule, of “Show me a competing offer and we’ll talk.”

But evidence of wage increases, however anecdotal, suggests the economy is finally getting close to, or maybe even beyond, its capacity limits. Where’s Waldo, ordinary folk ask. Where’s NAIRU is economists’ equivalent. NAIRU is the awkwardly named “non-accelerating inflation rate of unemployment,” that is, the rate of unemployment at which inflation neither accelerates nor decelerates but just is. The concept came along in the 1960s, out of work by economics Nobelist Milton Friedman, among others, when Jawaharlal Nehru, the first prime minister of independent India (from 1947 until his death in 1964), was world-famous. So the acronym was cool and clever.

The trouble with NAIRU is that it jumps about. So, like Waldo, it can be hard to find. Exactly when increases in employment start pushing wages up depends on lots of things: how many people are still out there waiting to be employed; how feisty workers are feeling; how strong unions are; how hard it is, given labour market rules and regulations, to hire new people; how easy it is, given search technologies, for workers to find new work if their raise request goes bad. (A search used to involve a pay phone, a stack of dimes and the classified ads but now there are apps for it — lots of them.)

The big debate in macroeconomic policy is the “are we there yet?” question — meaning at the NAIRU. The Bank of Canada’s latest Monetary Policy Report notes that wage growth is running at 2.7 per cent annually, which is below the 3.0 per cent that “has historically been consistent with an economy in which there is no labour market slack.” The current situation suggests, “some slack may remain or that other factors are restricting wage growth.”

Apart from my anecdote, I have no special insight on whether we’re there yet. A new paper by David Bell at the University of Sterling, in England, and David Blanchflower at Dartmouth College argues that NAIRU may now be as low as three per cent — maybe even lower — in both the U.K. and the U.S. (where unemployment rates are currently 4.3 and 4.1 per cent, respectively).

Bell and Blanchflower believe official unemployment rates don’t tell the whole story about labour market demand. You’ve also got to look at the underemployment rate. How many people are working part-time but would prefer to work full-time? Statistics Canada has monitored part-time employment since 1997 so it knows how many Canadians are working part-time (3.6 million in March), how many are doing it for personal preference (932,000) or because they’re going to school (1.2 million) or caring for children (323,000) or, finally, because they couldn’t find full-time work (792,000). Any who aren’t doing it out of choice are candidates for full-time employment if the demand for labour grows further.

One advantage of Britain’s unemployment survey is that it asks people how many more or fewer hours they’d like to be working at the going wage. That allows Bell and Blanchflower to construct a more precise measure of under-employment, one that nets the extra hours some part-timers want against the fewer hours some employed people say they’d prefer. In discussions of under-employment, we often forget about this second group, who are working more hours than they’d really prefer. But if they do feel overworked, that will affect how strong their bargaining position is regarding a raise.

Bell and Blanchflower found that by the end of 2017, those wanting “more hours” and “fewer hours” were roughly balanced, which is a change from 2013, when in aggregate Britons wanted an extra 18 million hours a week of work.

Picking the unemployment bottom, like picking the stock market top, is a game requiring more courage than I have. But for the long run, we should ditch tax and labour market rules that prevent people from working the hours they’d like, whether that’s more or fewer than they’re currently working.