Structural and Macro Policy and the Canada-US Unemployment Rate Gap

Understanding the causes of the Canada-US unemployment rate gap necessitates examining both supply and demand factors. The paper argues that, despite recent tightening, unemployment insurance remains a major factor in explaining the higher Canadian unemployment rate. On the policy front, the paper argues the importance of state-dependence: the recent conduct of policies heavily depends upon what was done in the past. For example, fiscal tightening, which could have influenced unemployment, was unavoidable because of the build-up of debt over the past two decades, which is very costly to the economy. The paper concludes that there is still a lot on this subject that is not well understood and recommends continued research in this area.