Archived — Canada in the 21st Century: Paper Number 9: Individual Responses to Changes in the Canadian Labour Market

by Paul Beaudry and David A. Green, University of British Columbia, under contract with Industry Canada, 1998


Introduction

Change is the single most pervasive element emphasized in current research on the labour market.
— Stephan F. Kaliski, 1985

More than ten years later, Kaliski's statement about the perceived state of change in the Canadian labour market is still relevant. Canadian society today is concerned with the effects of ongoing events such as the arrival of the information age, the constraints imposed by high public-sector debt and the impact of persistently high rates of unemployment. Those effects will be determined by the responses of individuals, firms and government, all bound by the framework set by Canada's institutions and place in the world economy. This paper, focussing on individual responses, has two goals: First, we seek to document recent patterns in individual labour market-related outcomes such as earnings, employment, school enrollment and family formation. Second, we shall attempt to predict how individual outcomes will continue to evolve in the next decade. In meeting these goals we shall concentrate on youth since we are concerned with how current and future turbulence in the labour market will permanently affect new entrants.

To document recent patterns, we must characterize the major labour market trends. However, observed trends over the last two decades reflect several different phenomena occurring simultaneously. For example, they reflect aggregate business cycle effects, differing relative outcomes for newer versus older cohorts of labour market entrants, and the ageing patterns of older cohorts. To understand how individuals may respond to current turbulence, it is important to untangle whether poor outcomes for young workers in the 1990s are due mainly to cyclical effects that will pass if and when aggregate labour market conditions improve, or whether they reflect permanent declines in the relative performance of recent labour market entrants. Predictions for youth would be gloomier if the poor outcomes in the 1990s reflect permanent declines for new cohorts rather than a particularly strong cyclical downturn that may soon be reversed. For this reason, a major part of the analysis is concerned with disentangling cohort versus business cycle effects.

Projecting observed trends into the future can take two forms. The first is a mechanical extension of past trends. This is useful for a short period but it becomes more uncertain the farther ahead we try to predict. Even mechanical extension, though, will depend on our success in untangling cyclical from cohort effects in the recent past. This is particularly true since we are more concerned with welfare over the entire life cycle of current youth rather than simply the nature of adjustments they must make in the short run. We are particularly interested in predicting the relative long-term success of new entrants rather than whether their outcomes will improve in the short run because of a cyclical upswing. Using this first prediction approach, we project outcomes for new entrants in the very near future.

To predict outcomes beyond the very short run of, say, three to five years, one needs a theory of what has caused existing trends and how that cause itself is likely to change. This is the second form of projection. Unfortunately, no one theory presents itself but information on past trends provides the extra service of helping us evaluate competing theories. We use past information in that way and settle on two plausible theories of underlying causes. We then describe two different predictive scenarios built from those theories.

As discussed above, our overriding concern is with outcomes for youths. However, we focus largely on and make predictions for 25 to 34 year-olds. We do so because we view this age as the time of a crucial transition to stable work patterns, accelerating careers and family formation. If change in the economy and the responses of youths to it generate permanent scars, these will be most evident in the time immediately following youth. The naturally high degree of flexibility of young people will make such scars difficult to detect directly. Alternatively, if current changes in the labour market require more adjustments from youth (for instance, in the form of prolonged schooling) but those adjustments still lead to stable work patterns at older ages, changes for youths may not arouse as much concern. We can evaluate this possibility directly by examining the experiences of different cohorts as they advance from age 25 to 34.

The remaining sections of the paper are structured as follows: In the next section, we provide an extensive overview of the changes occurring in the labour market, emphasizing how these changes are distributed across the population. The third section, which is the most novel aspect of the paper, presents a cohort-based analysis of observed changes in order to identify how opportunities are shifting for young workers. Drawing on the information presented in both the second and third sections, we map out, in the fourth section, two different scenarios of plausible adjustments by individuals to present changes. Finally, we summarize our main findings in the final section.

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