Since the 2008-09 recession, the unemployment rate has fallen to prerecession levels. Unprecedentedly, the employment rate has also trended downward, raising questions about the health of the labour market. It may seem odd for both of these metrics to go down at the same time, but there are circumstances in which this can happen.
An aging population is the main factor explaining the trend. Increases in employment of seniors were not high enough to reverse the decline in overall employment. To reverse the trend, we need policies that encourage greater labour-force participation, particularly among seniors.
Labour market indicators such as unemployment and employment rates are useful metrics for assessing the performance of the job market. Historically, these metrics moved in opposite directions, all else being equal.
Before the recession pushed up the jobless rate to 8.7 per cent in July, 2009, unemployment was around 6 per cent, a rate to which we only recently returned. Meanwhile, however, the employment rate of 61.4 per cent in August, 2018, is still 2.1 per cent below the prerecession rate.
This overall drop in the percentage of the population aged 15 and older that is employed has coincided with a bounce-back in the employment rate of the population aged 15 to 64 to prerecession levels, while older individuals (55 and over) have seen an increase in their employment rate. So what explains the overall decline?
The explanation lies in the shrinking rate of participation in the labour force, which in turn is related to the aging of the population.
While the employment rate measures the percentage of the working age population holding a job, the unemployment rate measures the percentage of unemployed people within the labour force – those of working age who have or are seeking a job. Statistics Canada’s Labour Force Survey shows that the labour-force participation rate has declined from 67.4 per cent in August, 2008, to 65.3 per cent in August, 2018. This shrinking can explain the simultaneous reductions in both employment and unemployment rates.
A low unemployment rate is not necessarily a sign of a robust job market when it is accompanied by shrinking labour-force participation, such as when the decline in the labour-force participation rate is a product of discouraged workers dropping out due to lack of success in finding an employment. Conversely, a falling employment rate is not necessarily a sign of a weak labour market, when it results from voluntary exits from the labour force for non-cyclical reasons such as retirement.
As it turns out, trends in labour-force participation by age are in line with those we see for the employment rate, and there is no age group showing a warning sign of discouraged workers. Although the participation rate has declined for youth aged 15 to 24, this decline was not strong enough to drag down the labour-force participation rate of the overall population aged 15 to 64.
However, the joint decline in employment and labour-force participation rates are consistent with an aging labour force, since labour-force participation declines with age. The number of persons aged 55 and over relative to those aged 15 and over has increased by more than six percentage points over the past 10 years. Although there has been a surge in the relative number of older individuals who stay active in the labour market, their participation rate is still well below the adult population. As such, the number of seniors exiting the labour market exceeds those who choose to postpone their retirement.
Governments can minimize the negative impact of an aging population on the labour market through later retirement policies. Gains in longevity and health make older workers able to work longer. Postponing retirement may itself contribute to seniors staying healthier. Older workers can remain active in the labour market for a longer period of time by participating in bridge jobs, such as part-time employment or self-employment. On-the-job training programs for seniors also encourage greater attachment to the labour force.
To ensure the labour market functions well in light of an aging work force, looking for policies that strengthen the labour-force participation of older workers and discouraging early retirement is necessary, accompanied by policies that do not discourage “bridge” job opportunities.
Parisa Mahboubi is a Senior Policy Analyst at the C.D. Howe Institute.