“Matching Shapes” – The labor market in Canada and in the US

David Andolfatto has an interesting take:

The question is this: Would you expect the labor market in the U.S. border states to look more like the Canadian labor market or more like the U.S. labor market?

There is good reason to believe, I think, that the demographics across the two countries are pretty similar (though certainly not identical). If the type of economic activity along the border is roughly similar across the two countries, then one might reasonably expect similar labor market behavior in Canada and the border states. But this is not what we see at all.

One chart shown is of the Employment-Population ratio in the two countries (with the US border states shown separately):

Border States_1

And Andolfatto sums up:

Once again, the border states look more like the U.S. in general, rather than Canada.
A preliminary conclusion is as follows: [1] If Canada-U.S. demographics are roughly similar; and [2] if U.S. border states are roughly similar to their Canadian counterparts in terms of sectoral composition; then the differences we observe between the two countries (in terms of labor market activity) are quite possibly driven by policy differences

Exactly what sort of policy differences we are talking about here remains an open question.

One possible answer comes from “matching shapes”.

Unfortunately navigating in Statistics Canada was “above my pay grade” (why don´t they all emulate FRED?). So what I did was to break up Andolfatto´s chart to show data only after 1992 (that´s the time the inflation targeting scheme began). The bottom chart depicts “monetary policy” (where an “easy stance” means NGDP is above or growing more than trend and vice-versa for “tight stance” – the NGDP Gap).

Border States_2

Highlights:

In (1), monetary policy “tightens” in Canada and “loosens” a bit in the US. In Canada the E-P ratio falls and in the US it rises.

In (2), monetary policy “loosens up” in Canada (NGDP growth higher than trend to take the economy back to trend) and “loosens” more strongly in the US. The E-P ratio goes up in both countries. Note, importantly, that the E-P ratio of the US border states goes up by more than for the rest of the country. One conjecture is that the border states were experiencing a “double-pull” from “monetary easing” in both the US and Canada.

In (3) in both countries NGDP is close to trend (“neutral policy”) so that the E-P ratio in both countries is similar (and there´s no difference in the E-P ratio between the border states and the rest of the US). Towards the end of that interval, monetary policy “tightens” in the US and “loosens” in Canada. That difference is reflected in the behavior of the respective E-P ratios,

In (4) NGDP falls by more in the US. The fall in the E-P ratio is also bigger in the US. Note that in US border states the E-P ratio falls less, reflecting(?) a “combined weaker push” from the smaller drop in Canadian NGDP.

(Noteworthy: In his last year as Head of Bank of Canada Mark Carney didn´t do a good job, “tightening” monetary policy by allowing NGDP to distance itself from trend.)

10 thoughts on ““Matching Shapes” – The labor market in Canada and in the US

  1. That shouldn’t have been too surprising. The labor markets (and markets in general) are very different between the states bordering the Mexican border and the Mexican states bordering the US border, despite some strong shared history (particularly look at El Paso).

  2. Marcus, O/T: regarding MOA vs UOA and you post here:
    http://thefaintofheart.wordpress.com/2014/03/08/macroeconomic-theory-is-not-the-best-analytical-framework-for-making-monetary-policy-decisions/#comment-13225
    I made the footnote in JP Koning’s latest post on this subject. I’m still not sure what to think about it though. He called what I was talking about the “Tom Brown multiplier” Lol.
    http://jpkoning.blogspot.com/2014/03/credit-cards-as-media-of-account.html

    • Tom, Under the “right circumstances, UOA=MOA=MOE. If MOA=UOA but different from MOE there´s something “wrong”. In dollarized countries, for example, MOA=UOA but the MOE is the domestic currency (at a fixed rate to UOA),

  3. I dot not believe that one in 20 Americans lost the desire to work suddenly post 2008…and now there is nothing to be done…such pathetic defeatism seems to define the inflation-monomaniacs…

  4. I’d be interested in back story on why Canada “tightened” NGDP in the early 1990s. What were they fighting? Inflation, NAFTA. weak loony do to low commodity prices, Jean Chretien, or something else? Any thoughts?

    • Having adopted IT, the BoC has to show it´s serious. (In 1994 inflation dropped to -1.8%). Unfortunately the Asia crisis and the big drop in commodity prices (negative terms of trade shock for Canada) came along in 1997. Unlike Australia they got “knocked-off”. But they, like the US in 2003, reversed course to “make things right”.

  5. Pingback: The labor market in Canada and in the US | The Corner

  6. Hi Marcus. I know it’s not the main point of your post, but:
    “Unfortunately navigating in Statistics Canada was “above my pay grade” (why don´t they all emulate FRED?).”

    YEAH!
    But now FRED seems to be abandoning a reliable and easy-to-use system, in favor of a highly unreliable system. Saved graphs are unreadable, except the PDF version. Sized graphs change size if you’re lucky enough to extract one. And I now have trouble combining individual data series into a calculated series. I figure I’m lucky the save-as XLS still works.

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