Unemployment rate misleading: Considering the ‘hidden unemployed’
The report does an excellent job of illustrating the potential shortcomings of the current method of calculating the unemployment rate. The current method involves estimating the labour force (those actively looking for jobs) and then comparing it to the total number of employed individuals in the labour force.
The problem of course is that when people give up looking for work or those who have gone back to school full time. Being involved in the post secondary world, I can tell you that we are busting at the seams with individuals getting second career retraining. These people are not counted among the workforce despite the fact that they would like to be working.
If the labour force had remained at its October 2008 levels, true unemployment would measure closer to 9% than the current 7.8%.
Yet many of the people who had dropped out of the labour force either due to discouragement or retraining will likely reenter it once they either complete their schooling or sense that the job market is picking back up.
We got an early glimpse of what this does to the unemployment rate a couple weeks ago when Stats Canada reported that a surprising 69,000 new jobs were created in January yet the unemployment rate rose as those entering the workforce increased at a greater rate than the new jobs were created.
The report also discussed what it called the ‘hidden unemployed’: Those who are currently working part time but would like to be working full time hours. Though they show up in the employment numbers, they mask underlying weakness in the job market. From the report:
“Between 2008 and 2010, the number of part-time workers working part-time because they could not find full-time work rose by almost 210,000 – from 711,200 in 2008 to 920,000 in 2010. The rate of involuntary part-time work – involuntary part-time work as a share of all part-time work – grew from 22.4% to 27.8% over this period.”
Average debt breaches the six figure mark; Debt-to-income ratio continues to swell
“The average total accumulated debt per Canadian household crept above the $100,000 mark in late 2010. This represents a 78% advance in real terms since 1990 and a 46% hike since 2000.”
I find the real (inflation adjusted) advance in household debt to be most shocking. Though I have explored this increase before, it nevertheless fails to shock me every time I read it. One of the interesting things in economics is to look for trends that are clearly unsustainable and then hypothesize on what will spark the mean reversion and what it will look like to the overall economy. That is the overall purpose of this blog. If you’re interested in reading more about this, check out the primer on ‘The Great Connection’.
The report suggests that as many as a million families are now at the mercy of interest rates in determining their financial stability. A rise in interest rates back to their long term averages over the course of several years would put one million families in serious financial distress.
In the meantime, the dead canaries are starting to pile up:
- In October 2010, some 17,400 mortgages were in arrears by three or more months. This compares to 11,500 before the recession began. This is an increase of 50%.
- The 90-day delinquency rate on credit cards increased from 0.88% before the recession to a peak of 1.34% in early 2010, or over 50% higher. The rate fell to 1.13% in July 2010, still 28% higher than the pre-recessionary level.
- About 32,300 Canadians became insolvent in the third quarter 2010. This is an improvement from earlier in 2010 but still 12% higher than pre-recession levels.
Consider that all of this is taking place with interest rates still hovering near all-time lows. Heaven forbid we see a resurgence of inflationary pressures or increased risk premium demanded by the bond market or things will go from precarious to roadkill in roughly 3.4 seconds.
Mortgage debt averages $172,000
When averaged across all households (i.e. those with and those without mortgages), the average household mortgage debt is $63,000. But remember that housing corrections begin when the margins are squeezed. If the sub-prime fiasco has taught us anything it is that a real estate free-fall begins when the number of marginal buyers are either exhausted or are stressed in their current financial obligation. With this in mind it’s worth noting that among those who currently have a mortgage, the average amount is $172,000, with this number being disproportionately swollen among new buyers.
On house prices…
“The increase in housing prices was mostly due to record low interest rates, lower down payment requirements, and longer amortization periods over which to pay back the mortgage. This created increased demand for homes among consumers and has contributed to the makings of a housing price bubble.
As suggested in last year’s report, “the conditions are still in place for a correction in house prices; when and by how much is the difficult question.” The “when” seems to be getting closer and closer or may have already arrived. Over time, the price decline could easily be in the double digit range. It is well to remember that U.S. house prices have fallen by more than one-quarter since 2006. Falling house prices may be good news for new home buyers but will erode the assets and balance sheets of many Canadian homeowners.”
Indeed, when compared to measures of fundamental value, housing looks like one giant, juicy bug lazily meandering along a busy highway. It’s increasingly likely that it will have an intimate encounter with a windshield.
Ending your week with some comedic entertainment:
What better way to send you into your weekend than with a chuckle. Thanks to the ‘The Whisperer’ for emailing me this gem.
Those who understand cause and effect might manage to force a smile. To those who don’t, two bits of advice:
1) Read this
2) Caveat emptor