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The Causes of Unemployment in Canada: A Review of the Evidence

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  • Stephen S. Poloz

    (Bank of Canada)

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    Abstract

    This paper reviews various competing theories of structural unemployment and considers whether they may be used to explain any of the rise in unemployment experienced by Canada during the most recent economic cycle. The central message that emerges is that one should take into account multiple possible structural explanations when forming judgments about the non-accelerating- inflation rate of unemployment (the NAIRU). Furthermore, the degree of uncertainty associated with existing empirical work suggests that one should allow for a range of NAIRU estimates in reaching an understanding of economic developments. A balanced assessment of the available methodologies suggests that the NAIRU has risen somewhat during the 1990s, mainly because of a steep rise in the rate of payroll taxation. Nevertheless, the paper concludes that this rise in the NAIRU is likely to be temporary, both because the payroll tax effect ought to be digestible over time and because some reforms to the unemployment insurance system have already been implemented.

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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 9502002.

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    Length: 25 pages
    Date of creation: 03 Feb 1995
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    Handle: RePEc:wpa:wuwpma:9502002

    Note: 25 printed pages, compressed PostScript file. If you have trouble viewing the complete document, please print it out on a PostScript printer. Other recent Bank of Canada working papers are listed on the last page of this report. Bank of Canada 94-11
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. David T. Coe, 1990. "Structural Determinants of the Natural Rate of Unemployment in Canada," IMF Staff Papers, Palgrave Macmillan, vol. 37(1), pages 94-115, March.
    2. Setterfield, M. A. & Gordon, D. V. & Osberg, L., 1992. "Searching for a will o' the wisp : An empirical study of the NAIRU in Canada," European Economic Review, Elsevier, vol. 36(1), pages 119-136, January.
    3. David Card & Richard B. Freeman, 1993. "Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States," NBER Books, National Bureau of Economic Research, Inc, number card93-1, July.
    4. Ashenfelter, Orley & Card, David, 1986. "Why Have Unemployment Rates in Canada and the United States Diverged?," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S171-95, Supplemen.
    5. Charles Adams & David T. Coe, 1990. "A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 232-293, June.
    6. John C. Ham & Samuel Rea, 1986. "Unemployment Insurance and Male Unemployment Duration in Canada," Working Papers 592, Princeton University, Department of Economics, Industrial Relations Section..
    7. David Card, 1992. "A Comparative Analysis of Unemployment in Canada and the United States," Working Papers 677, Princeton University, Department of Economics, Industrial Relations Section..
    8. Eswar Prasad, 1993. "Labor Market Aspects of Industrial Restructuring in Canada," IMF Working Papers 93/91, International Monetary Fund.
    9. Phipps, Shelley, 1990. "Quantity-Constrainted Household Responses to UI Reform," Economic Journal, Royal Economic Society, vol. 100(399), pages 124-40, March.
    10. Michael R. Darby & John C. Haltiwanger & Mark W. Plant, 1985. "Unemployment-Rate Dynamics and Persistent Unemployment Under Rational Expectations," NBER Working Papers 1558, National Bureau of Economic Research, Inc.
    11. Ross D. Milbourne & Douglas D. & W. David Scoones, 1989. "Unemployment Insurance and Unemployment Dynamics," Working Papers 750, Queen's University, Department of Economics.
    12. Pierre Fortin, 1991. "The Phillips Curve, Macroeconomic Policy, and the Welfare of Canadians," Canadian Journal of Economics, Canadian Economics Association, vol. 24(4), pages 774-803, November.
    13. Lucie Samson, 1985. "A Study of the Impact of Sectoral Shifts on Aggregate Unemployment in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 518-30, August.
    14. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
    15. A Carruth & M Hooker & A Oswald, 1994. "Unemployment, Oil Prices and the Real Interest Rate: Evidence from Canada and the UK," CEP Discussion Papers dp0188, Centre for Economic Performance, LSE.
    16. Jaeger, Albert & Parkinson, Martin, 1994. "Some evidence on hysteresis in unemployment rates," European Economic Review, Elsevier, vol. 38(2), pages 329-342, February.
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