Canada taking wrong approach to fighting unemployment during recessions

CALGARY, July 25, 2013 /CNW/ - National strategies like the recent Economic Action Plan are not the best answer for combating job losses caused by recession, according to a report published today by The School of Public Policy written by Professor Ron Kneebone and Margarita Gres.

"A nationally applied policy response will be appropriate for some regions of the country but inappropriate for others; it will be too weak a response in some areas while being too strong in others; and it will be applied too late in some regions and too soon in others," the authors write.

The authors analyze monthly data on labour market conditions dating back to 1976 and find that the timing and depth of employment recessions varies widely across provinces. This suggests that in order for "action plans" and tax cuts to be effective, they must be targeted to benefit only certain regions of the country at certain times. Of course, the time it takes to formulate such targeted responses, and the obvious political challenges they involve, raises the question of whether a national strategy can ever be designed that takes into account the varying economic conditions of a country with such a wide variety of industries and economic conditions.

As an example, Kneebone and Gres point to New Brunswick where the job market was only mildly affected by the most recent recession. They argue that federal spending there would have been at best, unnecessary or, at worst, harmful, crowding out private investment while having an inflationary effect on the regional economy. In Alberta, Ontario and BC, on the other hand, job markets were much more seriously affected for a much longer period of time.

Instead of trying to predict how much of a fiscal stimulus is required in each province, the authors recommend reliance on what they call "automatic stabilizers." These would include pre-established mechanisms like employment insurance, social assistance, and prescribed tax adjustments.

"Before the next recession comes, the federal government — and provincial governments as well — would be wiser to prepare by investing resources in legislating well-designed automatic stabilizers so these processes are in place to naturally kick in precisely where and when they are needed,"  they write. "With the right formula of automatic stabilizers responding quickly and precisely to economic contractions, the main job left for politicians would be persuading the public that resorting to action plans and national strategies is something we are better off avoiding."

The report can be found at www.policyschool.ucalgary.ca/publications

SOURCE: The School of Public Policy - University of Calgary

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