Employment mysteries

For much of 2011 and 2012, there was a surprising disconnect between UK economic growth data and developments in the labour market.  Although GDP was stagnant or even falling slightly,  the economy was creating jobs quarter after quarter, with a good proportion of the new positions arising in the private sector.  There was a lot of criticism at the time of the ONS's estimation methods, and suggestions that the GDP data would eventually be revised higher.

This is indeed what has happened:  it now transpires that the UK never really experienced a double-dip recession, though this hasn't deterred parts of the media from continuing to talk of a potential triple dip. The growth data are particularly interesting in light of last week's estimate from the Office of Budget Responsibility, the government's "independent" forecasting body, that the Coalition's clumsy and ineffective attempt to impose fiscal austerity since 2010 has cut almost 1.5 percentage points from GDP.

Remarkably, something similar now seems to be happening here in Canada.  Job creation was reasonably robust for most of 2012, yet when GDP data for the final quarter of the year were released late last month, they showed an annual growth rate of only 0.6%.  Always quick to react to a single data reading,  the nation's economists promptly downgraded their employment forecasts, only to be blindsided by the official employment data for February, which showed a 51,000 increase in the number employed. Employment has risen by 1.9% in the past year.

As was the case earlier in the UK, most of the new jobs in the latest Canadian data were full time, and more than half were in the private sector.  Economists are fond of describing employment as a lagging indicator: for a variety of reasons*, changes in employment tend to come some months after changes in growth.  That being the case, a strong increase in employment coming just a few months after a sharp slowdown in growth is surprising.  As in the UK, there must be a strong likelihood that the Canadian GDP growth numbers will be revised higher in due course.

The really interesting question, of course, is why these discrepancies between growth and jobs are happening.  Someone with a lot more analytical firepower than I will have to work on that one, but I strongly suspect that the techniques used by the official statistical agencies to estimate output are failing to keep up with the increasing involvement of the internet in all aspects of the modern economy.

* Companies don't fire people at the first sign of a downturn in business, in case the downturn proves temporary and they have to hire them back at higher wages later.  Similarly, when demand starts to grow, companies initially try to get more output from their existing employees, and only add staff when they think the upturn is reasonably permanent.