ECON 140W - Week 3

Class 5 - Jan. 20, 2026

Terminology

• Numbers in brackets are for 15+ in Canada in December

• Employed (21,056,400)

  • Includes people on leave (employed but zero hours worked)

• Unemployed (1,413,200)

• Not in the labour force (12,253,300)

• if you add 21,056,400 and 12,253,300, you get less than the population of Canada

  • Why? We don't count people under 15 years old

• Participation Rate (or activity rate)

  • (Employed + Unemployed) $÷$ Total population

• Employment rate

  • Employed $÷$ Total Population
  • Telling us about the long-run trend of environment

• Unemployment Rate

  • Unemployed $÷$ Labour Force
  • Unemp $÷$ (Unemp + Emp)
  • If unemployment rate right now is 6%, that doesn't mean employment rate is 94%

Seasonal Adjustments

• Measured unemployment rate in Canada went from 8.0% in August to 6.3% in December
• Commonly reported unemployment rate in Canada went from 7.1% in August to 6.8% in December
• Reported unemployment rates are adjusted for seasonality
  • Unemployment rates always high in January, July, August due to hiring processess
  • Unemployment rates always low in April, May, December
  • Adjust reported rates for these differences when comparing within a year

Dynamics of the Labour Market

• Labour market flows
  • People move between states (employed, unemployed, out of labour face)
  • Changes in the unemployment rate can reflect variety of changes
  • In recessions, some people may stop looking for jobs, so unemployment rate doesn't rise that much and in fact may go down
• Long-term unemployment is a significant problem

Other Employment Terminology

• R1 - 0.8% - is the fraction of the labour force who've been unemployed for longer than a year
• R2 - 2.7% - is the fraction of the labour force who've been unemployed for longer than 3 months
• R3 - compared to US rate (5.3%)
  • Always higher than US because
    • US starts counting at 16
    • Main reason: The question of "Are you looking for work?" differs. In the US you have to apply for a job or go to a government employment center. Compared to Canada where you can say you scrolled on indeed and didn't find any job
    • US has high prison population
• R4 - Unemployment (6.3%) - official measure (not seasonally adjusted)
• R5 - Discouraged (0.2%) - available but not looking
• R6 - Waiting (0.5%) - Not working, but waiting for a job to start/restart
  • If someone hires you in April but you don't start till August for example
• R7 - Involuntarily Part-Time (1.5%) - in full-time equivalents
  • Would like to work more, available for more hours, but can't
• R8 - Include R5, R6, R7 (8.5%)

Types of Unemployment

• Frictional unemployment
  • matching employers to employees takes time
  • Always positive
• Structural unemployment - usually 2.5-3%
  • Wages held above market clearing level
  • Always positive
• Long-run unemployment is equal to frictional plus structural (estimates between 5.0% and 6.5%)
• Cyclical unemployment is the variation over the business cycle - usually 2-3% because of people moving between jobs

Frictional Unemployment

• Job search takes time
  • Finding a good match, going through an application and interview process, etc.
  • While this happens - people are enemployed
• Policies that impact frictional unemployment
  • Employment insurance
    • If you're getting good benefits, you're less likely to take a job - causes increase in frictional unemployment
  • Job search, job training
    • Since you get employment insurance, there will be better job matching because people will spend more time looking at the best position for them

Structural Unemployment

• When wages are higher than the equilibrium level
  • Efficiency wages
    • Paying a higher wage to make you more efficienct, so they higher a bit less
    • Employers will often pay more than they absolutely have to because they don't want you to just leave
  • Unions
  • Job protection regulations
  • Minimum wage laws

Economic Costs of Unemployment

• Costs of unemployment depend on economic conditions
• Quality of job matches varies after unemployment
  • Depends on unemployment rate
• Unemployment can lead to hysteresis
  • Once unemployed, skills erode making it harder to find work
  • A period of unemployment can lead to a higher equilibrium unemployment rate
  • Long-term unemployment has longer-term consequences
• Government gave certain companies money to keep paying people to not work so that people don't just leave the industry with these specialized skills

Artificial Intelligence and Unemployment

• Equilibrium (non-cyclical) unemployment also falling in the U.S.
• People talk about AI replacing jobs
  • If you're automating something, somebody's job gets lost but another one is created
  • There is not a fixed amount of jobs
• Not clear this is happening yet
  

Productivity

• What about wages?
• Labour productivity commonly measured as output per worker or ouput per hour worked
  • Not the same as wages, but related
• From 1997 to 2025
  • Average hourly wages increased from $15.59 to $36.40 (not adjusted for inflation)
  • Average weekly wages increased from $573.50 to $1329.77

Class 6 - Jan. 22, 2026

• From province to province, participation rates and employment rates vary significantly!

Measuring Inflation

• Can be super easy and also super hard
• Identify a basket of goods people are going to buy
  • How much will that cost?
  • Measure it each year, and then another year, and then you find inflation
  • Includes food, housing, electronics, rent, etc. basically everything that Canadians buy
  • They track million of things people buy and measure the cost of the basket of all of it
  • Must choose a base year (always 100), and you measure the prince index relative to the base year
    • Currently, it's 2002
• Issues?
  • We need to account for the change in quality for goods
  • What exactly is in the basket of goods?
  • For example, streaming services did not exist back then, it was really just cable
  • How often do we change the goods that we're looking at?
    • They use some chain-related thingy to adjust it but nobody ever does it unless you work for Statistics Canada

Measures of Inflation

• We measure multiple different types of inflation
• All-items CPI - reflects average purchases in Canada (literally everything we buy)
• Core inflation - throw out all the food and energy purchases - natural gas, food, energy
  • We do this because the prices fluctuate a lot that is not due to the Canadian economy
• CPI-Median - tracks the 50th percentile of price changes
• Producer price index (PPI) - business inputs
  • Raw materials
  • This is a leading indicator of inflation (if these rise, they'll eventually raise prices)
• GDP deflator - prices of goods that Canada produces
  • GDP deflator = (Nominal GDP $÷$ Real GDP) $\times 100$
  • Any good that we import and don't produce will affect the CPI but not GDP deflator
    • Example: bananas, coffee, oranges, all kinds of food, semi conductors, sugar
  • We produce more than we consume of: oil, wheat, lumber

Core Inflation

• Common comparisons: CPI to GDP deflator or CPI versus Core Inflation
• Bank of Canada reports changes in core inflation
  • Measure that excludes all food and energy prices
  • They are highly traded commodities on the global scale
  • Changes in these prices are almost entirely unrelated to Canadian economic conditions
• Bank of Canada prefers other measures (CPI-median)
  • Key point - Bank of Canada using inflation measures for a specific purpose

Adjusting for Price Effects

• Use the prince index to adjust for price changes
• Nominal variables
  • Measured in current prices
  • If you go back to 1997, minimum wage was ~$7, but real minimum wage would say okay how much could $7, 28 years ago, buy today
• Real variables
  • Mostly talk about real GDP, real interest rates, etc.
• Real equals nominal minus inflation (approximately)
  • This is precisely true for interest rates
  • Real interest rate reflects the change in buying power
    Example:

This is less than today's $16.70.

• There's a problem with this statement though.
• CPI tracks everything, even things that regular Canadians don't buy
  • For example, a boat

Real Interest Rates (US Data)

• Real interest rates fell since 1980
  • Companies, people lend based on real interest rates, that's really all that matters
• Negative nominal interest rates are bad
• Real interest rates being negative is not necessarily bad
• Nominal interest rate minus expected inflation rates
• 7% interest implies doubling purchasing power in 10 years
  • Rule of thumb (Rule of 70): $$\frac{70}{7} = 10$$
• Zero real interest rates recently
• Why have real interest rates fallen? Chapter 14 says it all
  

Average Wages for Youth in Canada

• Data from December 2024 to December 2025
• Inflation was 2.4%
• Youth (15-24) - average wage increase 2.3% (or -0.1% real increase)
  • From $21.72 to $22.21
• Lower paid sectors (still focused on youth - 15-24)
  • Wholesale and retail trade - from $18.80 to $18.54 (not good)
  • Accommodation and food service - from $18.28 to $18.32
• Other sectors
  • Finance, Insurance, Real Estate (FIRE) - from $25.69 to $27.74 (+8.0% nominal, +5.6% real)
    • Not a huge group of people so varies often

Money Illusion and Nominal Wage Rigidity

• Money illusion
  • Focusing on changes in nominal dollar amounts
  • People get mad when they're nominal dollars go down
• Nominal wage rigidity
  • People focus on nominal wages - no one likes a pay cut
  • When cutting payroll costs, companies choose layoffs over pay cuts
  • In recessions, unemployment rises instead of wages falling
  • A key reason to target positive inflation (2%)

What is Money?

• Medium of exchange
  • Can you buy things with it?
• Unit of account
  • Do you record prices in that value?
  • Do accountants record balance sheets and income statements
• Store of value
  • Can you keep value in that product?
  • Can you reliably keep assets in that value and know what they will purchase
• Is gold money? Is Bitcoin?
  • BITCOIN IS NOT A UNIT OF ACCOUNT
  • IT'S NOT A MEDIUM OF EXCHANGE
    • The fact you can buy some things with it, doesn't mean it's a median exchange
  • In Nicaragua, they made bitcoin an official currency
    • This doesn't mean it's money though. In order to be considered money, it has to be generally accepted almost everywhere
• Is the US dollar money in Canada?
  • It's a decent medium of exchange, almost everybody accepts it!
  • Most grocery stores will accept it
  • It's not really a unit of account though

Expected vs. Unexpected Inflation

• What was expected inflation in 2025? What was inflation in 2025?
• If there's unexpected inflation, that throws prices out of whack quickly!
• What inflation rate should you expect in 2026?

Costs of Inflation

• With expected inflation,
  • "Menu" costs is more generally the decision process on what should we charge, "shoe-leather" costs
• With unexpected inflation,
  • Prices convey less information, redistribution (lenders vs. borrowers)
    • If you're gonna get $20/hour but don't know how much things will cost, you don't know what you can get
    • Inflation is good for students that owe money on student loans
      • If inflation happens during university, this is good because wages will then go up later