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CURRENT ANALYSIS
May 2014
What explains the decline in Canada’s labour force
participation rate?
Chart 1: Canada Participation Rate
%
69.0
68.0
67.0
66.0
65.0
64.0
63.0
Oct-2008
Actual participation rate
62.0
61.0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Statistics Canada, RBC Economics Research
Chart 2: Canada Want a Job but Not in Labour Force by Reason
Percent relative to Labour Force
0.9
0.8
0.7
0.6
0.5
0.4
0.3
Oct-08
In school
Discouraged Workers
Waiting for recall
0.2
0.1
Source: Statistics Canada, RBC Economics Research
Nathan Janzen
Economist
(416) 974-0579
[email protected]
Jul-2013
Apr-2014
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Apr-2005
Oct-2003
Jan-2003
Jul-2001
Apr-2002
Oct-2000
Jan-2000
Jul-1998
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Oct-1997
Jan-1997
0.0
The Canadian participation rate, the percentage of the population 15 and over
that is either working or actively looking for work, continued to decline in
April, falling to 66.1% from 66.2% in March and further below the 66.5% rate
a year earlier. This is a trend that has prevailed since hitting a pre-recession
peak of 67.8% in February 2008 (Chart 1). Given the relatively modest pace
of job growth in recent years, most recently averaging just 12K per month
over the past year, this has caused speculation that weak labour markets are
causing workers to become discouraged and give up their job search. When a
discouraged worker stops actively looking for work, they are no longer
counted as “in the labour force” which causes the participation rate to fall.
Since they are no longer in the labour force, these workers also no longer meet
the definition of “unemployed” and thus would not be included in the unemployment rate either. As a result, there has been speculation that the decline in
the unemployment rate during the recession recovery (to currently sit slightly
below its 10-year average at 6.9% in April) has also resulted from worker discouragement rather than fundamental improvement in labour markets.
Although an intuitively appealing argument, there is little data to support the
claim that unusual levels of worker discouragement are major factors in the
declines in labour force participation or the unemployment rate. Detailed data
from the Labour Force Survey, from which the Canadian participation and
unemployment rates are calculated, contains a count of the number of individuals age 15 and over who are not working, want a job, but have given up
looking because of discouragement about job prospects. Chart 2 shows that
while there was an increase in the number of these discouraged workers during
the recession, the increase was never really large enough to have a significant
impact on the participation rate and has fallen back below pre-recession levels.
The economic cycle could also have an impact on the participation rate by
encouraging some, particularly younger, workers to stay in school longer-thannormal to avoid a potentially difficult job search or through an increased number of workers waiting for recall. Chart 2 also shows, however, that the number of students who report they would really rather be working than in school,
relative to the size of the labour force, is not notably out of line with what was
observed prior to the 2008/09 recession and has, if anything, been trending
somewhat lower in recent months. The number of workers waiting for recall,
similarly, is in line with pre-recession levels and well-below higher rates earlier in the 1990s.
The more likely explanation is that longer-term demographic, rather than
short-term cyclical, factors lie behind the recent downward trend in the participation rate. The most important factor appears to have been the aging of the
baby boom generation and the resulting increase in the number of worker retirements. One way to illustrate this is to look at the change in the growth and
composition of the population that is classified as “not in the labour force”
and, thus, not included in the numerator of the labour force participation rate.
Most of the increase in the population “not in the labour force” since October
2008 has been concentrated those aged 65 years of age and over. This likely
entails a sizeable number of individuals retiring from the workforce. The total
number of people aged 15 and up classified as “not in the labour force” has
CURRENT ANALYSIS | MAY 2014
risen by more than 1 million from October 2008 to April 2014. As shown in
Chart 3, most of that increase (about 682K) was in the population 65 years of
age and over. Including all age cohorts, about 95% of the increase in the
population not in the labour force reflected an increase in the population who
report not wanting a job.
Chart 4 shows the Canadian participation rate along with a modified rate
calculated by holding the age composition of the population steady from
October 2008. In effect, this modified rate controls for the impact of the
shifting age composition of the population on the participation rate. Although it did dip lower during the recession, the rate has since been on an
upward trend and, notwithstanding some recent declines, still sits right in
line with its pre-recession level. This suggests that all of the decline in the
Canadian participation rate since the 2008/09 recession can be explained by
the aging of the population and a resulting increase in retirements. Interestingly, the idea that demographics could have a significant downward impact
on the participation rate is not new. A Statistics Canada study from June
2007 (ie. pre-recession) , for example, found that the Canadian participation
rate would fall sharply over the next couple of decades under a variety of
different scenarios, caused largely by population aging. The decline was
expected to be exacerbated beginning in 2011 when the first of the baby
boom generation began to reach retirement age.
Chart 3: Canada Not in the Labour Force by Age
Change since October 2008, Thousands
800
700
Total not in labour force
600
Not in the labour force and report not wanting a job
500
400
300
200
100
15-24
25-54
55-64
65+
Source: Statistics Canada, RBC Economics Research
Chart 4: Canada Participation Rate and Demographic Factors
%
69
68
68
67
67
66
66
Oct-2008
65
Actual participation rate
65
Participation rate with population held constant at October 2008 levels
64
2000
2001
2002
2003
2004
2005
2006
2007
Source: Statistics Canada, RBC Economics Research
ECONOMICS | RESEARCH
2008
2009
2010
2011
2012
2013
2014
The distinction between a decline in the participation rate driven by the exit
of discouraged workers from the labour force compared to a decline due to
longer-term non-cyclical factors, like retirements, has important implications
for the assessment of the current state of the Canadian labour force. The exit
of unemployed discouraged workers from the labour force lowers both the
participation rate and the unemployment rate; however, a voluntary exit from
the labour force resulting from a worker retirement lowers just the participation rate. The impact on the unemployment rate is typically negligible since
both the labour force and employment are usually reduced by the same
amount. The fact that the decline in the labour force participation rate in
Canada appears to have been driven largely by worker retirements suggests
that the decline in the unemployment rate does reflect cyclical improvement
in labour markets rather than the exit of discouraged workers from the labour
force.
CURRENT ANALYSIS | MAY 2014
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