4.5.1 Labour Market Indicators

Understand the key indicators of labour market activity: participation rate and unemployment rate. Learn with Canadian Securities Course certification preparation guide.

Labour Market Indicators

There are two key indicators that describe activity in the labour market: the participation rate and the unemployment rate.

  • Participation Rate: This rate represents the share of the working-age population that is in the labour force. It is an important indicator because it shows the willingness of people to enter the work force and take jobs.

  • Unemployment Rate: This rate represents the share of the labour force that is unemployed and actively looking for work. This rate may rise when the number of people that are employed falls or when the number of people looking for work rises (or when both occur simultaneously).

Calculating Labour Market Indicators

Both of these rates are calculated as follows:

Participation Rate:

$$ \text{Participation Rate} = \left( \frac{\text{Labour Force}}{\text{Working Age Population}} \right) \times 100 $$

Unemployment Rate:

$$ \text{Unemployment Rate} = \left( \frac{\text{Not Working but Actively Looking for Work}}{\text{Labour Force}} \right) \times 100 $$

Example Calculation

Assume that a country has 25 million people of working age. Of those 25 million, 19 million are working and 1 million are not working but are actively looking for work. The remaining 5 million people are not working and not actively looking for work. Some people in this group are students, some are retired, and some are discouraged and have stopped looking for work.

  • Labour Force = 19M + 1M = 20M

Participation Rate:

$$ \text{Participation Rate} = \left( \frac{20M}{25M} \right) \times 100 = 80\% $$

Unemployment Rate:

$$ \text{Unemployment Rate} = \left( \frac{1M}{20M} \right) \times 100 = 5\% $$

In Canada, the participation rate has increased since the 1960s, primarily because of the increased participation of women in the workforce. As of June 2020, the participation rate is about 63.8%. For the past decade, Canada’s participation rate averaged approximately 65.5%. The participation rate is a key measure of the productivity of a society. A society where only 50% of the working-age population is willing to work is not as productive as a society where 70% of the working-age population is willing to work.

Figure 4.5 shows the patterns in the annual Canadian unemployment rate since the 1960s. In general, the upward trend with large fluctuations corresponds to the trend and stages of the business cycle. There is a strong correlation between declining GDP during recessionary periods and increased unemployment.

In 2020, the monthly unemployment rate in Canada jumped dramatically due to measures taken against the worldwide pandemic. It rose from 5.6% in February to 7.8% in March, and to 13.0% in April.

Criticisms of Unemployment Rate Measurement

Critics argue that the method of measuring unemployment has flaws. For example, it does not distinguish between those unemployed for a short time and those unemployed for long periods.

  • Discouraged Workers: At times, job prospects are so poor that some unemployed people drop out of the labour force and become discouraged workers. These individuals are available to work but have given up their search because they cannot find jobs. If too many workers become discouraged, the unemployment rate actually falls because they are no longer considered part of the labour force.

  • Underemployment: Many people considered part of the labour force are underemployed; they are working part-time, often in jobs that do not make good use of their skills. Despite having jobs, their potential productivity is not fully utilized, leading to a lower unemployment rate which does not reflect the nation’s true loss of productivity.

Key Takeaways

  • Participation Rate and Unemployment Rate are crucial indicators of the labour market.
  • Participation Rate shows the proportion of working-age individuals willing to find work.
  • Unemployment Rate indicates the percentage of the labour force that is without a job but actively seeking employment.
  • Historical data reveals trends correlated with the business cycle and economic events.
  • Critics highlight flaws such as the treatment of discouraged workers and the issue of underemployment.

Glossary

Participation Rate: The percentage of the working-age population that is engaged in the labour force. Labour Force: The sum of all employed and unemployed individuals willing and able to work. Unemployment Rate: The proportion of the labour force that is not employed but actively seeking a job. Discouraged Workers: Individuals who are available for work but have stopped searching because of the belief that no jobs are available for them. Underemployment: A situation where individuals are working in a capacity that does not fully utilize their skills, often part-time or lower-tier jobs.


CSC® Exams Practice Questions

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## What does the participation rate represent in the labour market? - [ ] The share of unemployed people who are looking for work. - [x] The share of the working-age population that is in the labour force. - [ ] The level of job satisfaction among workers. - [ ] The average income of participants in the labour force. > **Explanation:** The participation rate represents the share of the working-age population that is in the labour force and indicates the willingness of people to enter or remain in the workforce. ## How is the participation rate calculated? - [ ] (Unemployed / Working Age Population) * 100 - [ ] (Labour Force / Number of Employed) * 100 - [x] (Labour Force / Working Age Population) * 100 - [ ] (Number of Employed / Labour Force) * 100 > **Explanation:** The formula for the participation rate is (Labour Force / Working Age Population) * 100. ## What does the unemployment rate represent? - [ ] The percentage of people in the working-age population who are not working. - [ ] The rate at which people find jobs. - [x] The share of the labour force that is unemployed and actively looking for work. - [ ] The percentage of people who are underemployed. > **Explanation:** The unemployment rate represents the share of the labour force that is unemployed and actively looking for work. ## How is the unemployment rate calculated? - [ ] (Labour Force / Unemployed) * 100 - [x] (Unemployed / Labour Force) * 100 - [ ] (Working Age Population / Unemployed) * 100 - [ ] (Number of Employed / Labour Force) * 100 > **Explanation:** The formula for the unemployment rate is (Unemployed / Labour Force) * 100. ## Given a country with a working-age population of 25 million, a labour force of 20 million, and 1 million unemployed, what is the unemployment rate? - [ ] 4% - [x] 5% - [ ] 20% - [ ] 10% > **Explanation:** The unemployment rate is calculated as (1 million / 20 million) * 100 = 5%. ## What was the average participation rate in Canada for the past decade as of June 2020? - [ ] 63.8% - [ ] 70.2% - [ ] 60.5% - [x] 65.5% > **Explanation:** The participation rate in Canada averaged approximately 65.5% for the past decade as of June 2020. ## As of June 2020, what was the approximate participation rate in Canada? - [ ] 65.8% - [ ] 70.2% - [x] 63.8% - [ ] 60.5% > **Explanation:** The participation rate in Canada as of June 2020 was about 63.8%. ## What can cause the unemployment rate to fall even during poor job prospects? - [ ] An increase in part-time opportunities. - [x] An increase in the number of discouraged workers who stop looking for work. - [ ] An increase in retirement rates. - [ ] A higher minimum wage. > **Explanation:** The unemployment rate can fall when job prospects are poor because some unemployed people become discouraged and stop looking for work, thus exiting the labour force. ## What is a key critique of how the unemployment rate is measured? - [ ] It tracks only short-term unemployment. - [ ] It does not account for students or retirees. - [ ] It does not include underemployment or discouraged workers. - [x] Both underemployment and discouraged workers are not adequately considered. > **Explanation:** Critics argue that the unemployment rate does not adequately account for underemployed workers (working part-time or not utilizing their skills) or discouraged workers who have stopped looking for jobs. ## What trend is generally observed in unemployment rates during recessionary periods? - [x] Unemployment rates increase. - [ ] Unemployment rates decrease. - [ ] Unemployment rates remain stable. - [ ] Unemployment rates show no correlation with economic cycles. > **Explanation:** During recessionary periods, unemployment rates generally increase due to declining GDP and businesses laying off workers.

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