Structural Unemployment: How Important Are Labour Market Policies and Institutions?

The variation in unemployment rates across OECD countries has often been interpreted as clear evidence that labour policies and institutions matter a great deal. The basis of this argument (most frequently applied to European countries but also to Canada) is that high payroll taxes, rigid labour regulations, and unresponsive union contracts inflate the cost of labour and that generous welfare programs reduce work incentives. This paper reviews the international empirical research evaluating the unemployment impacts of these labour policies and then considers the results in the Canadian context. The results suggest that the effect of different labour market policies and institutions on unemployment is by no means a simple as the as the conventional wisdom suggests. At any rate, after the reforms of the past 15 years, it is hard to argue on the basis of the empirical evidence that relatively high levels of unemployment in Canada are primarily due to labour market inflexibility resulting from our policies and institutions. In the final analysis, a credible explanation for Canada's unemployment record must look beyond unemployment insurance, taxes, unions, and labour law.