Position: We currently are long Canada via the etf, EWC
We reinitiated our long position in Canada late last week on the back of some extensive work we had been doing comparing the fiscal health of Canada versus the United States. We also wanted to make a quick call out highlighting comparative unemployment trajectories between the two countries.
Our Lead Desk Analyst, Andrew Barber, looked at unemployment rates going back in both Canada and the United States about thirty years to 1979. Over that entire time period, the United States has, on average, been 2.51% more employed. That is, the unemployment ratio has been lower by 2.51%. The chart comparing these long term rates is attached below.
For the past nine months, unemployment in the United States has been higher than in Canada. The only other period in which that was the case was from 1, which was a period in which Canada was between 0.1% and 0.4% more employed. As of the most recent data points, Canada is currently 1.0% more employed, which is a full 3.51% above the thirty year average between the countries.
Historically, unemployment in Canada and the United States has been very close. The first key divergence occurred in the recession of 1 and was attributed primarily to differing fiscal responses to the recession in both countries and a greater dependence of the U.S. on foreign oil. The unemployment rates of both countries effectively entered the 1980s in lock step until 1982 when the U.S. began a long and sustained period of lower unemployment.
A key factor that led to this divergence was outlined by David Card from Princeton University in a 1995 paper entitled, "Unemployment in Canada and the United States: A Further Analysis". According to Card:
"The relatively low UI qualification thresholds in Canada create a variety of incentives for individuals to change their annual work patterns . . . Other individuals who might, in the absence of UI, have worked a substantially larger fraction of the year have an incentive to reduce their annual weeks of work, since once the individual is qualified for UI the net income per week of work is equal to the weekly wage minus the UN benefit that the individual is entitled to."
In effect, the Canadian unemployment system is, and has been, set up to potentially incentivize certain segments of the population to remain unemployed longer and for certain parts of the year.
The two countries also classify unemployed workers slightly differently. Primarily, this difference relates to the treatment of passive job seekers. This is a group whose job is to find a job. In Canada, this group is categorized as unemployed and in the unemployment statistics, while in the United States this group is shifted out of the labor force. This is estimated to account for up to 1/5 the employment difference between the two countries.
In summary, while unemployment is inherently a backward looking indicator, the divergence in unemployment rates between Canada and the United States is noteworthy, especially given that Canada by way of classification and incentivizes should have a higher unemployment rate. To the extent that commodities continue to re-flate it is exceedingly likely that Canada continues to widen the unemployment spread and relative GDP growth rates should reflect this.
Daryl G. Jones