Why Have Unemployment Rates in Canada and the U.S. Diverged?
AbstractThroughout the post-war period, U.S. and Canadian unemployent rates moved in tandem, but this historical link apparently ended in 1982. During the past three years, Canadian unemployment rates have been some three percentage points higher than their U.S. analogues, and this gap shows no sign of diminishing. This paper is an empirical evaluation of a variety of explanations for this new unemployment gap. We first show that the demographic and industrial composition of the two countries is remarkably similar, so that no simple mechanical hypothesis explain the basic puzzle. It is also evident that the increase in Canadian unemployment relative to U.S. unemployment can not be fully attributed to output movements. We find that the gap between actual and predicted Canadian output, based on U.S. output, has fallen dramatically since 1982 while the unemployment gap has widened. We also find that unemployment in Canada was 2 to 3 percentage points higher in 1983 and 1984 than predicted by Canadian output. We have investigated a variety of hypotheses to explain the slow growth of employment in Canada after 1982. These hypotheses attribute the slow growth of employment to rigidities in the labor market that raise employers' costs and restrict the flow of workers between sectors. The evidence does not support the notion that the growth in relative unemployment in Canada is due to differences in the regulation of the labor market in the two countries. Minimum wage laws and unemployment benefits are fairly similar in Canada and the U.S., and neither has changed relative to the other in the last decade. Unionization rates have increased in Canada relative to US. since 1970. Most of this divergence occured before 1980, however, and does not seem to have created an unemployment gap prior to 1980. Finally,the hypothesis that differential real wage rates are a major determinant of relative employment in the U.S. and Canada is soundly rejected by the data. Real wage rates have been essentially uncorrelated with employment movements within each country and between the two countries.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1840.
Date of creation: Feb 1986
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Publication status: published as Ashenfelter, Orley and David Card. "Why Have Unemplo yment Rates in Canadaand the U.S. Diverged?" Economia, Vol. 53, No. 210 (Supplement), S171-S195, July 1986.
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Other versions of this item:
- Orley Ashenfelter & David Card, 1986. "Why Have Unemployment Rates in Canada and the U.S. Diverged?," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 584, Princeton University, Department of Economics, Industrial Relations Section..
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
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- Gary Burtless, 1983. "Why Is Insured Unemployment So Low?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 225-254.
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- Ashenfelter, Orley C & Card, David, 1982.
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- Orley Ashenfelter & David Card, 1982. "Time Series Representation of Economic Variables and Alternative Models of the Labor Market," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 528, Princeton University, Department of Economics, Industrial Relations Section..
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- Peter Kuhn (McMaster) & A. Leslie Robb (McMaster), .
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