The much-stronger-than-expected jump in total employment in April took just about every economy watcher, including the vast majority of Bay Street analysts, by surprise. Several analysts downplayed the significance of the 35,900-job jump in total employment, however, because it was the result of a 37,000 increase in self employment, according to Statistics Canada’s Labour Force Survey.

According to these commentators, while some of the newly self employed would be highly paid consultants, the bulk would be working in lower paying jobs that lack the security and benefits of most private-sector or government positions. While this may be an accurate observation, it completely overlooks the fact that increases in self employment are a very reliable indicator of economic recovery, i.e., self employment leads to private- and public-sector hiring.

By contrast, larger companies, and to a lesser extent governments, take longer to lay off surplus workers when demand drops and consequently are unwilling or unable, due to cumbersome hiring procedures, to add staff until they are certain that a pickup in their sales is likely to persist.

As the chart below illustrates, since 1986, major upswings in economic activity have been preceded by a pickup in self employment, with a lead of six to 12 months. In the current business cycle, year-over-year growth of self employment turned positive in September 2009 and has been trending higher for the past nine months.

Assuming a six-to-12-month lead time, this recent upturn in self employment suggests that the overall pace of economic growth in Canada should turn positive either late in the second quarter or sometime in the third quarter. This prospect is reinforced by the fact that the year-over-year rate of growth of self employment has been trending higher in seven of the 10 provinces since January 2009.

Gross Domestic Product (GDP) and Self Employment

Data source: Statistics Canada/Chart: Reed Construction Data – CanaData.