Unemployment Jan 2006

The latest unemployment rates and numbers have been released by the US Department of Labour and Statistics Canada. They show that unemployment has risen last December 2005 from 6.4 % in November to 6.5 % for Canada but dropped from 5.0% to 4.9 % over the same time period in the US. The rate in Québec has also risen to over 8 %. How come ? I believe part of the explanation lies in the overly tight monetary and fiscal policy being pursued in Canada as opposed to in the US. While both central banks have been tightening and raising rates The US continues to run a small but significant budget deficit which combined with low rates is stimulative. Canada has somewhat higher rates and a substantial budget surplus which is not stimulative. Over the past ten years 1995 to 2005 if one compares unemployment performance the results are quite striking. In the US unemployment has ranged from a low of 3.9 % in September through December 2000 to a high of 6.3 % in June and July of 2003. Canadian performance over the same period is much less impressive. I believe the explanation lies in the tighter monetary and fiscal policy that was pursued in Canada.
After the election dust settles in Canada it will be useful to pursue this analysis further. Despite all the conventional wisdom about the merits of supply side approaches I believe that importance of aggregate demand and the impact of monetary and fiscal policy upon aggregate demand is still widely misunderstood. More on this later.