Labour supply over the life cycle and the business cycle

Intertemporal substitution is the shifting of work toward the periods when the wage is high. The rise and fall of wages over a career is anticipated, so it changes the price of leisure from year to year without changing lifetime wealth, and hours follow the age-earnings profile. Over the business cycle, a recession pushes some people into the labour force (the added-worker effect) and others out of it (the discouraged-worker effect). The discouraged-worker effect dominates, so participation is procyclical: it falls in recessions and rises in expansions.

The age-earnings profile

Wages rise steeply early in a career, as workers accumulate skills on the job, peak around age 50, and then flatten or decline.¹ These are evolutionary changes: the worker knows they are coming.

Median employment income by age group, Canada

2024, people with employment income, both genders

15 to 24$13,400

25 to 34$49,400

35 to 44$62,800

45 to 54$67,500

55 to 64$52,700

65 and over$13,200

Median employment income is lowest for the youngest and oldest groups and peaks at ages 45 to 54. Earnings combine wages and hours, and the end groups include many part-time and part-year workers, so the chart mixes the wage profile with the hours profile the model explains.Source: Statistics Canada, Table 11-10-0239-01, Income of individuals by age group, gender and income source, Canada, provinces and selected census metropolitan areas. Retrieved 2026-10-23.

Show the data and notes

Canadian Income Survey. Median employment income (wages, salaries, commissions and net self-employment income) among people with employment income (zeros excluded), in 2024 dollars. Includes part-time and part-year workers, which pulls down the medians of the youngest and oldest groups.

Category	Median employment income
15 to 24	$13,400
25 to 34	$49,400
35 to 44	$62,800
45 to 54	$67,500
55 to 64	$52,700
65 and over	$13,200

Intertemporal substitution

In the life-cycle model a worker plans consumption and leisure over a whole life, saving and borrowing to smooth consumption. The price of an hour of leisure at age $a$ is the wage at age $a$. A known hump in wages is already counted in lifetime wealth, so moving along it carries no income effect: only the substitution effect operates, and the worker supplies the most hours when time is most valuable. The hours profile therefore has the same shape as the wage profile.

Intertemporal substitution elasticity

0.50

Wage at 25 (age 50 = 100)

54

Hours at 25 (age 50 = 100)

73

Hours at 62 (age 50 = 100)

93

Open in Graph Lab

Figure 1. A wage profile that rises steeply, peaks at 50 and declines, with both curves equal to 100 at age 50. With an intertemporal substitution elasticity of 0.5, hours at 25 are 73 percent of their peak while the wage is 54 percent of its peak: hours follow the wage, less steeply. A larger elasticity makes hours track the wage more closely.

This prediction differs from the static model. There, a raise is new income, so it has an income effect that for men roughly cancels the substitution effect (the labour supply curve and elasticity). The distinction is between kinds of wage change:

• An anticipated wage change, such as moving along the age-earnings profile, shifts work between years with no income effect.
• An unanticipated wage change, such as a surprise permanent raise, raises lifetime wealth and so adds an income effect. Its effect on hours is ambiguous, as in the static model.

The same distinction applies across people. A worker whose wage is higher at every age is wealthier over his life, so comparing two workers involves an income effect even though each responds to his own wage profile by substitution alone.

Hours response to a permanently higher wage

−0.10

Jack's hours at 50

40.0

Joe's hours at 50

37.3

Open in Graph Lab

Figure 2. Joe's wage is twice Jack's at every age. Both work most when their own wage peaks, so both hours profiles are hump-shaped. With an elasticity of −0.1 with respect to a permanently higher wage, as estimated for men, Joe works about 7 percent fewer hours than Jack at every age; if the substitution effect dominated, he would work more.

Intertemporal responses are hard to measure when workers cannot freely choose their hours. Most earlier studies found very small or insignificant intertemporal substitution effects. In a field experiment where workers could choose both their hours and their effort, Fehr and Goette found a large positive response of total labour supply to a temporary wage increase, a larger response of hours, and a fall in effort per hour.² Reviewing quasi-experimental studies, Chetty, Guren, Manoli and Weber find micro estimates of intertemporal (Frisch) elasticities an order of magnitude smaller than macroeconomic models need to explain the swings in hours over business cycles.³

Participation and hours over the life cycle

Labour force participation rate by age group, Canada

Annual averages, both genders

• 15 to 24
• 25 to 54
• 55 to 64
• 65 and over

Participation is hump-shaped in age. Prime-age (25 to 54) participation rose by 15 points between 1976 and 2025. Participation at 55 to 64 fell until the mid-1990s and has risen by about 20 points since.Source: Statistics Canada, Table 14-10-0327-01, Labour force characteristics by gender and detailed age group, annual. Retrieved 2026-10-23.

Show the data and notes

Annual averages of monthly Labour Force Survey estimates. The table has no 55–64 age group, so the 55–64 rate is computed here as (labour force aged 55–59 + 60–64) ÷ (population aged 55–59 + 60–64) × 100 from the same table's published levels; applied to groups StatCan does publish, this method reproduces its rates to within 0.1 point. The Labour Force Survey covers the 10 provinces; it excludes the territories, people living on reserves, full-time members of the Canadian Armed Forces and people living in institutions.

Period	15 to 24	25 to 54	55 to 64	65 and over
1976	63.6%	73.5%	53.1%	9.2%
1977	64.6%	74.1%	52.3%	8.5%
1978	65.6%	75.5%	52.1%	8.3%
1979	67.4%	76.4%	53.0%	8.3%
1980	68.6%	77.3%	52.6%	8.0%
1981	69.3%	78.7%	52.2%	7.8%
1982	67.3%	78.6%	51.7%	7.8%
1983	67.6%	79.4%	51.1%	7.3%
1984	68.0%	80.0%	50.5%	7.3%
1985	68.6%	81.1%	50.5%	7.1%
1986	69.7%	82.0%	49.6%	6.7%
1987	70.3%	82.6%	49.3%	6.7%
1988	70.6%	83.3%	49.4%	6.6%
1989	71.2%	84.0%	49.1%	6.7%
1990	69.9%	84.3%	49.2%	6.7%
1991	68.1%	84.1%	48.5%	6.7%
1992	66.2%	83.4%	48.2%	6.5%
1993	64.4%	83.5%	47.8%	6.2%
1994	63.9%	83.3%	48.1%	6.6%
1995	63.2%	83.3%	47.1%	6.2%
1996	62.2%	83.4%	47.1%	6.1%
1997	61.5%	83.9%	48.2%	6.3%
1998	61.8%	84.3%	48.7%	6.5%
1999	63.5%	84.6%	49.7%	6.2%
2000	64.4%	84.8%	50.9%	6.0%
2001	64.7%	85.1%	51.2%	6.1%
2002	66.5%	85.9%	53.4%	6.7%
2003	67.3%	86.4%	56.6%	7.5%
2004	66.8%	86.5%	57.3%	7.7%
2005	65.9%	86.3%	57.9%	8.1%
2006	67.1%	86.3%	58.3%	8.3%
2007	68.0%	86.6%	59.4%	8.8%
2008	68.3%	86.7%	60.0%	9.9%
2009	66.4%	86.6%	61.4%	10.5%
2010	65.6%	86.5%	61.9%	11.3%
2011	65.6%	86.4%	62.2%	11.8%
2012	65.0%	86.7%	62.9%	12.4%
2013	65.2%	86.7%	64.0%	13.0%
2014	65.3%	86.3%	64.0%	13.3%
2015	65.4%	86.5%	64.4%	13.4%
2016	64.8%	86.5%	65.3%	13.5%
2017	65.4%	87.0%	65.5%	14.1%
2018	65.0%	87.1%	66.2%	14.1%
2019	65.8%	87.5%	66.6%	14.9%
2020	62.2%	86.4%	65.9%	14.0%
2021	64.2%	87.9%	67.9%	14.2%
2022	65.3%	88.5%	66.6%	14.5%
2023	65.0%	88.8%	67.8%	14.9%
2024	63.1%	88.6%	67.8%	15.0%
2025	63.0%	88.5%	67.5%	15.2%

In 2025 participation in Canada was 63.0 percent at ages 15 to 24, 88.5 percent at 25 to 54, 67.5 percent at 55 to 64 and 15.2 percent at 65 and over. The life-cycle model explains the hump through both sides of the participation comparison. Wages are low early in a career and decline late. Reservation wages are high for students, whose time has a high value in school, for parents of young children, and for older people, whose accumulated wealth and pension income raise non-labour income and whose health may raise the value of leisure. Hours among those who work follow the same hump, as Figure 1 predicts.

The business cycle: added and discouraged workers

A recession lowers wages and job-finding chances, with two opposite effects on participation:

• Added-worker effect. When a household’s main earner loses a job or takes a pay cut, household income falls. For a secondary earner who was not working, this is a fall in non-labour income, which lowers the reservation wage, so some start looking for work. Their participation is countercyclical: it rises in bad times.
• Discouraged-worker effect. When jobs are scarce, the expected return to searching falls below the value of time in other uses, and some unemployed people stop looking. They leave the labour force. Their participation is procyclical: it falls in bad times.

The discouraged-worker effect dominates,¹ so the aggregate participation rate is procyclical. In Canada it fell from 65.0 to 64.4 percent in 1982, from 67.3 percent in 1989 to 64.7 percent in 1996, and from 66.0 to 64.4 percent in 2020, rising again in each recovery.

Labour force participation rate, Canada

Annual averages, population aged 15 and over

The overall participation rate fell in the recessions of the early 1980s, the early 1990s and 2020 and rose again in the recoveries.Source: Statistics Canada, Table 14-10-0327-01, Labour force characteristics by gender and detailed age group, annual. Retrieved 2026-10-23.

Show the data and notes

Annual averages of monthly Labour Force Survey estimates. The LFS recorded sex before 2022 and gender from 2022; Statistics Canada combines them in one series. From 2022 "Men" and "Women" are its Men+ and Women+ categories, each of which includes some non-binary persons. The Labour Force Survey covers the 10 provinces; it excludes the territories, people living on reserves, full-time members of the Canadian Armed Forces and people living in institutions.

Period	All
1976	61.5%
1977	61.9%
1978	62.7%
1979	63.7%
1980	64.3%
1981	65.0%
1982	64.4%
1983	64.7%
1984	65.0%
1985	65.6%
1986	66.1%
1987	66.5%
1988	66.8%
1989	67.3%
1990	67.1%
1991	66.6%
1992	65.7%
1993	65.3%
1994	65.2%
1995	64.8%
1996	64.7%
1997	64.9%
1998	65.1%
1999	65.5%
2000	65.8%
2001	65.9%
2002	66.9%
2003	67.6%
2004	67.5%
2005	67.1%
2006	67.2%
2007	67.5%
2008	67.6%
2009	67.3%
2010	67.1%
2011	66.8%
2012	66.7%
2013	66.7%
2014	66.2%
2015	66.1%
2016	65.8%
2017	66.0%
2018	65.8%
2019	66.0%
2020	64.4%
2021	65.5%
2022	65.5%
2023	65.8%
2024	65.5%
2025	65.3%

The added-worker effect is real but limited. Following wives before and after their husbands lost jobs, Stephens finds small effects before the job loss and large, persistent increases after it; over the long run the extra work makes up for more than a quarter of the husbands’ lost earnings.⁴ Unemployment insurance weakens the response: Cullen and Gruber estimate that each dollar of benefits is associated with wives earning up to 73 cents less, because public insurance replaces the family’s self-insurance.⁵ Canada’s Employment Insurance replaces part of a laid-off worker’s earnings in the same way.

What it means for measured unemployment

The unemployment rate is the unemployed divided by the labour force. Discouraged workers are not searching, so they count as out of the labour force, not as unemployed. When they stop searching, both the numerator and the denominator fall, and the measured rate drops although nobody found work. The official rate therefore understates joblessness in recessions.

Unemployment rate, Canada

Monthly, seasonally adjusted, population aged 15 and over

The unemployment rate peaked at 13.1 percent in December 1982, 12.1 percent in November 1992, 8.8 percent in June 2009 and 14.2 percent in May 2020.Source: Statistics Canada, Table 14-10-0287-01, Labour force characteristics, monthly, seasonally adjusted and trend-cycle. Retrieved 2026-10-23.

Show the data and notes

Seasonally adjusted Labour Force Survey estimates, both genders; revised periodically. The Labour Force Survey covers the 10 provinces; it excludes the territories, people living on reserves, full-time members of the Canadian Armed Forces and people living in institutions.

Period	Unemployment rate
Jan 1976	7.1%
Feb 1976	7.0%
Mar 1976	6.7%
Apr 1976	6.8%
May 1976	6.9%
Jun 1976	6.9%
Jul 1976	7.4%
Aug 1976	7.1%
Sep 1976	7.0%
Oct 1976	7.4%
Nov 1976	7.4%
Dec 1976	7.5%
Jan 1977	7.6%
Feb 1977	7.9%
Mar 1977	7.8%
Apr 1977	7.9%
May 1977	7.8%
Jun 1977	7.8%
Jul 1977	8.1%
Aug 1977	8.2%
Sep 1977	8.3%
Oct 1977	8.4%
Nov 1977	8.5%
Dec 1977	8.5%
Jan 1978	8.3%
Feb 1978	8.3%
Mar 1978	8.5%
Apr 1978	8.4%
May 1978	8.6%
Jun 1978	8.4%
Jul 1978	8.3%
Aug 1978	8.4%
Sep 1978	8.4%
Oct 1978	8.2%
Nov 1978	8.3%
Dec 1978	8.3%
Jan 1979	8.2%
Feb 1979	8.0%
Mar 1979	7.9%
Apr 1979	8.0%
May 1979	7.6%
Jun 1979	7.4%
Jul 1979	7.2%
Aug 1979	7.1%
Sep 1979	7.0%
Oct 1979	7.2%
Nov 1979	7.2%
Dec 1979	7.2%
Jan 1980	7.5%
Feb 1980	7.6%
Mar 1980	7.6%
Apr 1980	7.7%
May 1980	7.8%
Jun 1980	7.7%
Jul 1980	7.6%
Aug 1980	7.6%
Sep 1980	7.3%
Oct 1980	7.3%
Nov 1980	7.2%
Dec 1980	7.3%
Jan 1981	7.4%
Feb 1981	7.4%
Mar 1981	7.4%
Apr 1981	7.1%
May 1981	7.2%
Jun 1981	7.2%
Jul 1981	7.2%
Aug 1981	7.1%
Sep 1981	8.1%
Oct 1981	8.3%
Nov 1981	8.3%
Dec 1981	8.7%
Jan 1982	8.6%
Feb 1982	8.9%
Mar 1982	9.3%
Apr 1982	9.8%
May 1982	10.3%
Jun 1982	11.1%
Jul 1982	11.9%
Aug 1982	12.0%
Sep 1982	12.4%
Oct 1982	12.9%
Nov 1982	12.9%
Dec 1982	13.1%
Jan 1983	12.7%
Feb 1983	12.7%
Mar 1983	12.5%
Apr 1983	12.4%
May 1983	12.4%
Jun 1983	12.4%
Jul 1983	11.9%
Aug 1983	11.7%
Sep 1983	11.4%
Oct 1983	11.3%
Nov 1983	11.3%
Dec 1983	11.3%
Jan 1984	11.3%
Feb 1984	11.3%
Mar 1984	11.3%
Apr 1984	11.5%
May 1984	11.7%
Jun 1984	11.3%
Jul 1984	11.2%
Aug 1984	11.3%
Sep 1984	11.8%
Oct 1984	11.3%
Nov 1984	11.4%
Dec 1984	11.1%
Jan 1985	10.6%
Feb 1985	10.8%
Mar 1985	11.0%
Apr 1985	10.8%
May 1985	10.6%
Jun 1985	10.7%
Jul 1985	10.4%
Aug 1985	10.3%
Sep 1985	10.2%
Oct 1985	10.3%
Nov 1985	10.3%
Dec 1985	10.1%
Jan 1986	9.8%
Feb 1986	9.9%
Mar 1986	9.8%
Apr 1986	9.7%
May 1986	9.5%
Jun 1986	9.6%
Jul 1986	9.6%
Aug 1986	9.6%
Sep 1986	9.5%
Oct 1986	9.4%
Nov 1986	9.4%
Dec 1986	9.5%
Jan 1987	9.5%
Feb 1987	9.5%
Mar 1987	9.4%
Apr 1987	9.2%
May 1987	8.9%
Jun 1987	8.9%
Jul 1987	8.7%
Aug 1987	8.6%
Sep 1987	8.4%
Oct 1987	8.3%
Nov 1987	8.2%
Dec 1987	8.0%
Jan 1988	8.1%
Feb 1988	7.8%
Mar 1988	7.8%
Apr 1988	7.7%
May 1988	7.8%
Jun 1988	7.6%
Jul 1988	7.8%
Aug 1988	7.8%
Sep 1988	7.8%
Oct 1988	7.8%
Nov 1988	7.8%
Dec 1988	7.5%
Jan 1989	7.5%
Feb 1989	7.6%
Mar 1989	7.5%
Apr 1989	7.8%
May 1989	7.7%
Jun 1989	7.5%
Jul 1989	7.5%
Aug 1989	7.3%
Sep 1989	7.3%
Oct 1989	7.2%
Nov 1989	7.5%
Dec 1989	7.7%
Jan 1990	7.9%
Feb 1990	7.7%
Mar 1990	7.3%
Apr 1990	7.6%
May 1990	7.8%
Jun 1990	7.6%
Jul 1990	7.9%
Aug 1990	8.1%
Sep 1990	8.5%
Oct 1990	8.8%
Nov 1990	9.1%
Dec 1990	9.5%
Jan 1991	9.8%
Feb 1991	10.2%
Mar 1991	10.5%
Apr 1991	10.3%
May 1991	10.2%
Jun 1991	10.5%
Jul 1991	10.5%
Aug 1991	10.5%
Sep 1991	10.3%
Oct 1991	10.3%
Nov 1991	10.4%
Dec 1991	10.3%
Jan 1992	10.4%
Feb 1992	10.5%
Mar 1992	10.9%
Apr 1992	10.7%
May 1992	10.9%
Jun 1992	11.4%
Jul 1992	11.3%
Aug 1992	11.7%
Sep 1992	11.6%
Oct 1992	11.4%
Nov 1992	12.1%
Dec 1992	11.7%
Jan 1993	11.2%
Feb 1993	11.0%
Mar 1993	11.2%
Apr 1993	11.6%
May 1993	11.6%
Jun 1993	11.7%
Jul 1993	11.6%
Aug 1993	11.2%
Sep 1993	11.5%
Oct 1993	11.3%
Nov 1993	11.2%
Dec 1993	11.4%
Jan 1994	11.4%
Feb 1994	11.1%
Mar 1994	10.6%
Apr 1994	10.9%
May 1994	10.7%
Jun 1994	10.3%
Jul 1994	10.1%
Aug 1994	10.2%
Sep 1994	10.1%
Oct 1994	10.0%
Nov 1994	9.7%
Dec 1994	9.6%
Jan 1995	9.6%
Feb 1995	9.6%
Mar 1995	9.7%
Apr 1995	9.5%
May 1995	9.5%
Jun 1995	9.5%
Jul 1995	9.6%
Aug 1995	9.5%
Sep 1995	9.2%
Oct 1995	9.3%
Nov 1995	9.2%
Dec 1995	9.4%
Jan 1996	9.4%
Feb 1996	9.5%
Mar 1996	9.6%
Apr 1996	9.3%
May 1996	9.2%
Jun 1996	9.8%
Jul 1996	9.7%
Aug 1996	9.4%
Sep 1996	9.9%
Oct 1996	9.9%
Nov 1996	9.9%
Dec 1996	9.7%
Jan 1997	9.5%
Feb 1997	9.5%
Mar 1997	9.3%
Apr 1997	9.4%
May 1997	9.4%
Jun 1997	9.1%
Jul 1997	8.9%
Aug 1997	8.9%
Sep 1997	8.8%
Oct 1997	8.9%
Nov 1997	8.9%
Dec 1997	8.5%
Jan 1998	8.8%
Feb 1998	8.6%
Mar 1998	8.4%
Apr 1998	8.3%
May 1998	8.3%
Jun 1998	8.4%
Jul 1998	8.3%
Aug 1998	8.1%
Sep 1998	8.2%
Oct 1998	8.0%
Nov 1998	8.0%
Dec 1998	8.1%
Jan 1999	7.9%
Feb 1999	7.9%
Mar 1999	7.9%
Apr 1999	8.2%
May 1999	7.9%
Jun 1999	7.6%
Jul 1999	7.6%
Aug 1999	7.4%
Sep 1999	7.5%
Oct 1999	7.2%
Nov 1999	6.9%
Dec 1999	6.8%
Jan 2000	6.8%
Feb 2000	6.9%
Mar 2000	6.9%
Apr 2000	6.7%
May 2000	6.6%
Jun 2000	6.7%
Jul 2000	6.8%
Aug 2000	7.0%
Sep 2000	6.9%
Oct 2000	7.0%
Nov 2000	6.9%
Dec 2000	6.8%
Jan 2001	6.9%
Feb 2001	7.0%
Mar 2001	7.1%
Apr 2001	7.1%
May 2001	7.0%
Jun 2001	7.2%
Jul 2001	7.1%
Aug 2001	7.2%
Sep 2001	7.2%
Oct 2001	7.3%
Nov 2001	7.5%
Dec 2001	8.1%
Jan 2002	8.0%
Feb 2002	7.9%
Mar 2002	7.9%
Apr 2002	7.7%
May 2002	7.8%
Jun 2002	7.6%
Jul 2002	7.6%
Aug 2002	7.4%
Sep 2002	7.6%
Oct 2002	7.6%
Nov 2002	7.5%
Dec 2002	7.6%
Jan 2003	7.5%
Feb 2003	7.5%
Mar 2003	7.4%
Apr 2003	7.6%
May 2003	7.8%
Jun 2003	7.6%
Jul 2003	7.7%
Aug 2003	7.8%
Sep 2003	7.9%
Oct 2003	7.6%
Nov 2003	7.4%
Dec 2003	7.3%
Jan 2004	7.3%
Feb 2004	7.3%
Mar 2004	7.3%
Apr 2004	7.2%
May 2004	7.1%
Jun 2004	7.2%
Jul 2004	7.1%
Aug 2004	7.0%
Sep 2004	6.9%
Oct 2004	7.1%
Nov 2004	7.2%
Dec 2004	7.1%
Jan 2005	6.9%
Feb 2005	7.0%
Mar 2005	6.9%
Apr 2005	6.7%
May 2005	7.0%
Jun 2005	6.8%
Jul 2005	6.7%
Aug 2005	6.7%
Sep 2005	6.7%
Oct 2005	6.7%
Nov 2005	6.3%
Dec 2005	6.6%
Jan 2006	6.7%
Feb 2006	6.6%
Mar 2006	6.5%
Apr 2006	6.5%
May 2006	6.2%
Jun 2006	6.3%
Jul 2006	6.5%
Aug 2006	6.5%
Sep 2006	6.5%
Oct 2006	6.3%
Nov 2006	6.5%
Dec 2006	6.3%
Jan 2007	6.4%
Feb 2007	6.3%
Mar 2007	6.3%
Apr 2007	6.3%
May 2007	6.2%
Jun 2007	6.1%
Jul 2007	6.0%
Aug 2007	6.0%
Sep 2007	6.0%
Oct 2007	6.0%
Nov 2007	6.1%
Dec 2007	6.2%
Jan 2008	6.1%
Feb 2008	6.1%
Mar 2008	6.2%
Apr 2008	6.2%
May 2008	6.2%
Jun 2008	6.1%
Jul 2008	6.2%
Aug 2008	6.2%
Sep 2008	6.3%
Oct 2008	6.4%
Nov 2008	6.7%
Dec 2008	7.0%
Jan 2009	7.5%
Feb 2009	8.1%
Mar 2009	8.4%
Apr 2009	8.4%
May 2009	8.7%
Jun 2009	8.8%
Jul 2009	8.8%
Aug 2009	8.7%
Sep 2009	8.5%
Oct 2009	8.6%
Nov 2009	8.6%
Dec 2009	8.6%
Jan 2010	8.4%
Feb 2010	8.4%
Mar 2010	8.3%
Apr 2010	8.2%
May 2010	8.2%
Jun 2010	8.0%
Jul 2010	8.2%
Aug 2010	8.2%
Sep 2010	8.2%
Oct 2010	8.1%
Nov 2010	7.9%
Dec 2010	7.8%
Jan 2011	7.8%
Feb 2011	7.8%
Mar 2011	7.8%
Apr 2011	7.8%
May 2011	7.7%
Jun 2011	7.7%
Jul 2011	7.4%
Aug 2011	7.4%
Sep 2011	7.5%
Oct 2011	7.5%
Nov 2011	7.6%
Dec 2011	7.5%
Jan 2012	7.7%
Feb 2012	7.6%
Mar 2012	7.4%
Apr 2012	7.4%
May 2012	7.6%
Jun 2012	7.4%
Jul 2012	7.3%
Aug 2012	7.4%
Sep 2012	7.4%
Oct 2012	7.4%
Nov 2012	7.4%
Dec 2012	7.3%
Jan 2013	7.1%
Feb 2013	7.1%
Mar 2013	7.3%
Apr 2013	7.2%
May 2013	7.1%
Jun 2013	7.2%
Jul 2013	7.3%
Aug 2013	7.3%
Sep 2013	7.1%
Oct 2013	7.3%
Nov 2013	7.1%
Dec 2013	7.4%
Jan 2014	7.3%
Feb 2014	7.3%
Mar 2014	7.1%
Apr 2014	7.1%
May 2014	7.3%
Jun 2014	7.2%
Jul 2014	7.1%
Aug 2014	7.0%
Sep 2014	7.0%
Oct 2014	6.8%
Nov 2014	6.8%
Dec 2014	6.7%
Jan 2015	6.8%
Feb 2015	6.9%
Mar 2015	6.9%
Apr 2015	7.0%
May 2015	6.9%
Jun 2015	6.9%
Jul 2015	7.0%
Aug 2015	7.1%
Sep 2015	7.1%
Oct 2015	7.0%
Nov 2015	7.1%
Dec 2015	7.3%
Jan 2016	7.2%
Feb 2016	7.3%
Mar 2016	7.2%
Apr 2016	7.3%
May 2016	7.1%
Jun 2016	7.0%
Jul 2016	7.0%
Aug 2016	6.9%
Sep 2016	7.0%
Oct 2016	6.9%
Nov 2016	6.8%
Dec 2016	6.9%
Jan 2017	6.9%
Feb 2017	6.6%
Mar 2017	6.7%
Apr 2017	6.5%
May 2017	6.6%
Jun 2017	6.5%
Jul 2017	6.3%
Aug 2017	6.2%
Sep 2017	6.2%
Oct 2017	6.3%
Nov 2017	6.2%
Dec 2017	6.0%
Jan 2018	5.9%
Feb 2018	6.0%
Mar 2018	5.8%
Apr 2018	5.8%
May 2018	5.9%
Jun 2018	6.0%
Jul 2018	5.9%
Aug 2018	6.0%
Sep 2018	5.8%
Oct 2018	5.6%
Nov 2018	5.7%
Dec 2018	5.6%
Jan 2019	5.7%
Feb 2019	5.8%
Mar 2019	5.8%
Apr 2019	5.7%
May 2019	5.5%
Jun 2019	5.6%
Jul 2019	5.7%
Aug 2019	5.7%
Sep 2019	5.6%
Oct 2019	5.6%
Nov 2019	5.9%
Dec 2019	5.6%
Jan 2020	5.5%
Feb 2020	5.8%
Mar 2020	8.5%
Apr 2020	13.7%
May 2020	14.2%
Jun 2020	12.6%
Jul 2020	10.9%
Aug 2020	10.1%
Sep 2020	9.1%
Oct 2020	9.0%
Nov 2020	8.6%
Dec 2020	8.9%
Jan 2021	9.2%
Feb 2021	8.5%
Mar 2021	7.7%
Apr 2021	8.2%
May 2021	8.3%
Jun 2021	7.9%
Jul 2021	7.4%
Aug 2021	7.1%
Sep 2021	7.0%
Oct 2021	6.5%
Nov 2021	6.1%
Dec 2021	5.9%
Jan 2022	6.4%
Feb 2022	5.5%
Mar 2022	5.4%
Apr 2022	5.4%
May 2022	5.2%
Jun 2022	4.9%
Jul 2022	4.8%
Aug 2022	5.2%
Sep 2022	5.1%
Oct 2022	5.1%
Nov 2022	5.0%
Dec 2022	5.0%
Jan 2023	5.1%
Feb 2023	5.2%
Mar 2023	5.1%
Apr 2023	5.1%
May 2023	5.2%
Jun 2023	5.4%
Jul 2023	5.4%
Aug 2023	5.4%
Sep 2023	5.5%
Oct 2023	5.7%
Nov 2023	5.8%
Dec 2023	5.8%
Jan 2024	5.7%
Feb 2024	5.9%
Mar 2024	6.1%
Apr 2024	6.2%
May 2024	6.3%
Jun 2024	6.4%
Jul 2024	6.4%
Aug 2024	6.6%
Sep 2024	6.5%
Oct 2024	6.6%
Nov 2024	7.0%
Dec 2024	6.7%
Jan 2025	6.7%
Feb 2025	6.6%
Mar 2025	6.8%
Apr 2025	6.9%
May 2025	7.0%
Jun 2025	6.9%
Jul 2025	6.9%
Aug 2025	7.1%
Sep 2025	7.1%
Oct 2025	6.9%
Nov 2025	6.6%
Dec 2025	6.8%
Jan 2026	6.5%
Feb 2026	6.7%
Mar 2026	6.7%
Apr 2026	6.9%
May 2026	6.6%
Jun 2026	6.5%
Jul 2026	6.4%
Aug 2026	6.4%
Sep 2026	6.5%

Statistics Canada publishes supplementary rates for this reason. R5 adds discouraged searchers, people who wanted work and were available but did not look because they believed no work was available, to the official rate, R4. In the unadjusted monthly data the gap between R5 and R4 was 0.0 points in June 2007, 0.2 points in June 2009 and 0.7 points in May 2020.⁶ The 2020 shock was larger than that measure shows: in its first estimate for April 2020, Statistics Canada put the official rate at 13.0 percent and calculated that counting people who had worked recently and wanted to work but had not searched would raise it to 17.8 percent.⁷ (The chart shows the current, revised estimates.)

Whether discouraged workers should count as unemployed is not clear-cut. Some are choosing leisure while its price, the wage they could earn, is unusually low, which is intertemporal substitution rather than involuntary idleness.¹

Discouraged workers (thousands)

20

Added workers searching (thousands)

0

Measured unemployment rate

7.14%

Rate counting discouraged workers

9.00%

Labour force (thousands)

980

Open in Graph Lab

Figure 3. A recession leaves 90 thousand of a 1,000-thousand labour force unemployed, a 9 percent rate. When 20 thousand discouraged workers stop searching, the measured rate falls to 7.14 percent although no one found a job; counting them as unemployed keeps it at 9 percent. Added workers who start searching raise the measured rate.

Key idea

Anticipated wage changes over a career produce only substitution, so hours follow the wage profile. Over the business cycle the discouraged-worker effect outweighs the added-worker effect, so participation is procyclical and the official unemployment rate understates joblessness in recessions.

Worked example

1. A recession. A labour force of 1,000,000 has 90,000 unemployed: $u = 90{,}000/1{,}000{,}000 = 9\%$.

2. Discouraged workers leave. 20,000 unemployed stop searching. Unemployment falls to 70,000 and the labour force to 980,000, so $u = 70{,}000/980{,}000 = 7.14\%$. Counting them as unemployed gives $90{,}000/1{,}000{,}000 = 9\%$.

3. Added workers enter. 30,000 spouses of laid-off workers start looking for work. Unemployment is now 100,000 and the labour force 1,010,000, so $u = 9.90\%$. The measured rate depends on which effect is larger, not only on how many jobs were lost.

4. The life cycle. Suppose hours are proportional to $w^{0.5}$ and a worker’s wage at 25 is 64 percent of her wage at 50. Then $h_{25}/h_{50} = 0.64^{0.5} = 0.80$: she works 80 percent of her age-50 hours at 25.

Common mistakes

Traps on exams

• Giving the career wage profile an income effect. Anticipated wage changes shift work between years; only unanticipated changes, or differences between people, change lifetime wealth.
• Reversing the cyclical directions. The added-worker effect is countercyclical; the discouraged-worker effect is procyclical. The net, procyclical participation, reflects the discouraged-worker effect dominating.
• Counting discouraged workers as unemployed. They are out of the labour force because they are not searching.
• Reading a falling unemployment rate in a recession as good news. It can fall because people stopped looking.

On the exam

For the life cycle, draw the wage profile and the hours profile on the same age axis with matching humps, and say “anticipated, so substitution only”. For the business cycle, define both effects, give their cyclical direction, state which dominates, and finish with the consequence for the measured unemployment rate.

Check yourself

1.

Over the business cycle the discouraged-worker effect dominates the added-worker effect. What does this imply?

1The labour force participation rate is procyclical, and the official unemployment rate understates joblessness in recessions2The participation rate is countercyclical, and the official unemployment rate overstates joblessness in recessions3The participation rate does not change over the cycle4The unemployment rate is procyclical

Check answer

2.

In a recession, 90,000 of a labour force of 1,000,000 are unemployed. Then 20,000 of the unemployed stop searching because they believe no jobs are available. What is the measured unemployment rate, in percent?

Your answer (percent)

Check answer

3.

Joe's wage is higher than Jack's at every age, and both face hump-shaped wage profiles that they anticipate. The income effect of a permanently higher wage dominates its substitution effect. What does the model predict?

1Both work most in their high-wage years, but Joe works fewer hours than Jack at every age2Joe works more hours than Jack at every age, because his wage is higher3Joe's hours are flat over his life, while Jack's are hump-shaped4Joe and Jack work the same hours at every age, because their profiles have the same shape

Check answer

Practise more questions on this topic

Sources

1. Borjas, G. J. Labor Economics, 8th edition. McGraw-Hill Education, chapter 2. ↩ ↩² ↩³

2. Fehr, E. and Goette, L. (2007). Do workers work more if wages are high? Evidence from a randomized field experiment. American Economic Review, 97(1), 298 to 317. doi:10.1257/aer.97.1.298. ↩

3. Chetty, R., Guren, A., Manoli, D. and Weber, A. (2011). Are micro and macro labor supply elasticities consistent? A review of evidence on the intensive and extensive margins. American Economic Review, 101(3), 471 to 475. doi:10.1257/aer.101.3.471. ↩

4. Stephens, M. (2002). Worker displacement and the added worker effect. Journal of Labor Economics, 20(3), 504 to 537. NBER working paper 8260. ↩

5. Cullen, J. B. and Gruber, J. (2000). Does unemployment insurance crowd out spousal labor supply? Journal of Labor Economics, 18(3), 546 to 572. doi:10.1086/209969. ↩

6. Statistics Canada, Table 14-10-0077-01, Supplementary unemployment rates, monthly, unadjusted for seasonality, retrieved 2026-10-23. Definitions of R4, R5 and discouraged searchers are in the table notes. ↩

7. Statistics Canada, Labour Force Survey, April 2020, The Daily, May 8, 2020. ↩