Canada's strong job growth has come to an end in January as major firms announce layoffs amid other signs of a cooling economy. The nation's unemployment rate dropped to 7% from 7.1% due to a shrinking labour force while on the other hand, Canada's trade deficit, decrease in government spending, as well as consumer spending have also contributed slow growth in aggregate demand. This commentary will evaluate the implications of the aforementioned scenario on firms, and consumers. Aggregate demand is defined as the total planned level of spending on domestic goods and services within the borders of an economy at various average price levels. The components that affect aggregate demand are consumer
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While the unemployment rate has decreased, the use of unemployment rates in gauging the condition of an economy is fraught with problems. The problem in Canada is the decreasing unemployment rate due to the egress of workers from the labour force. While the unemployment rate may have fallen, there are more people left without jobs. Underestimating the unemployment rate brings the danger of skewing economic forecasts in over projecting growth, and thus firms may not be able to respond accordingly and incur losses. As businesses lay off workers to save money, aggregate supply will further decrease, which in turn decreases aggregate demand due to the lower purchasing power of consumers. In the long run, without a set of policies to counter this problem, Canada’s economy may dive into a recession as the GDP shrinks and true unemployment levels rise. To correct this issue, the government must apply the appropriate supply side policies to increase aggregate supply. As "[job loses] were partly offset by gains in construction...and in professional, scientific, and technical services" the problem appears to be a lack of skills. A solution would be to increase tuition subsidies and provide better information on the demand for such skills in various sectors of the economy.
Figure 2.0 – Supply side policy improving education
In figure 2.0, AS1 increases as more