The clock is ticking for Canada's labour market

The COVID-19 pandemic caused the most severe downturn in the Canadian labour market since the 1930s. In March and April, approximately 2.9 million Canadian workers (including 383,000 British Columbians) were laid off or furloughed as part of the public health response to “flatten the curve”. Although many have been reinstated as some businesses reopened in May and June, employment remains around 1.1 million nationally, and around 170,000 provincially, below pre-pandemic levels.

It is critical that employment be recovered as quickly as possible because of the insidious effects of sustained unemployment. Long term unemployment, which will be defined here as being unemployed for more than one year, tends to spike following recessions (Figure 1) and to be higher among men (Figure 2).

Figure 1

Figure 2

Researchers find long term unemployment to have profound and sustained negative impacts, for example:

• Abraham et al. (2018) find that long term unemployment is largely “state dependent” – that is, the greater the duration of unemployment, the lower the likelihood that a worker will find subsequent employment. It follows that the lower probability of finding new employment significantly affects the earnings of those who fall into long term unemployment.
• Jacobson et al. (1993)find that for high tenure workers laid off by distressed firms, long term earnings fall by about 25% per annum and never return to their previous levels.
• Pissarides (1992) finds that workers’ skills deteriorate due to long periods of unemployment, and that their diminished human capital makes them less attractive for rehiring by firms.
• Nichols et. al (2013) summarizes an extensive literature on the subject. They conclude: “Loss of a job can lead to losses of income in the short run, permanently lower wages, and result in worse mental and physical health and higher mortality rates. Further, parental job loss hampers children’s educational progress and lowers their future earnings.”

Specific to the Canadian experience, a recent Statistics Canada study by Ching et. al (2020) finds:

• “During the last three recessions (1981-1982, 1990-1992 and 2008-2009), young workers, less educated workers, and recently hired workers were more likely to be laid-off – temporarily or permanently – than other employees. This is still the case so far: layoff rates since February 2020 have been higher among the aforementioned groups than among other groups of workers.
• During the last three recessions, roughly 45% of all laid-off workers were permanently laid-off. The remainder were involved in temporarily layoffs. But these temporarily laid-off workers were not insulated from subsequent job loss: about 15% of them lost their job the following year.
• Job loss reduces the earnings of many displaced workers not only in the short term, but also in the longer term. From the late 1970s to the early 2010s, at least one in five permanently laid-off workers saw their real earnings decline by at least 25% even five years after job loss.
• Although Employment Insurance benefits offset part of the earnings losses, these benefits are usually exhausted after one year. As a result, five years after job loss, the earnings losses of displaced workers can be mitigated only by the progressivity of the tax and transfer system and, for some of those who are married or in a common-law relationship, by an increase in the annual hours worked by their spouse (Stephens, 2002).”

Conclusion

The public health response to the COVID-19 pandemic saw an extraordinary number of Canadian workers laid off or furloughed during March and April. Employment has only partially recovered since. The longer the duration of unemployment, the greater the risk of long term unemployment with all its attendant economic and societal ills. It is therefore imperative to recover and grow business activity, investment and employment levels as quickly and safely as possible. For unemployed workers, the clock is ticking.