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

  • Stephen S. Poloz

    (Bank of Canada)

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    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. L'auteur examine differentes theories du chomage structurel et la possibilite de s'en inspirer pour tenter d'expliquer les hausses du chomage que le Canada a connues au cours du dernier cycle economique. La principale conclusion de cette etude est qu'il faut tenir compte de plusieurs hypotheses de nature structurelle lorsqu'on forme des jugements au sujet du taux de chomage non accelerationniste (TCNA). En outre, les resultats des estimations effectues jusqu'ici sur cette variable etant incertains, il y aurait peut-etre lieu de prendre en compte un eventail d'estimations du TCNA afin d'en arriver a une certaine comprehension de l'evolution de l'economie. Un examen equilibre des diverses methodologies indique que le TCNA s'est accru un peu au cours des annees 90, en raison principalement de la forte augmentation du taux des charges sociales. Neanmoins, l'auteur en vient a la conclusion que cette hausse du TCNA ne devrait etre que temporaire, d'une part, parce que l'effet des charges sociales devrait finir par etre absorbe au fil du temps et, d'autre part, parce que certaines reformes de l'assurance-chomage ont deja commence a entrer en vigueur.

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    Paper provided by Bank of Canada in its series Working Papers with number 94-11.

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    Handle: RePEc:bca:bocawp:94-11
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    1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Working Papers 1950, National Bureau of Economic Research, Inc.
    2. Darby, Michael R & Haltiwanger, John C & Plant, Mark W, 1985. "Unemployment Rate Dynamics and Persistent Unemployment under Rational Expectations," American Economic Review, American Economic Association, vol. 75(4), pages 614-37, September.
    3. 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.
    4. Phipps, Shelley, 1990. "Quantity-Constrainted Household Responses to UI Reform," Economic Journal, Royal Economic Society, vol. 100(399), pages 124-40, March.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. Adams, Charles & Coe, David T., 1989. "A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States," MPRA Paper 8622, University Library of Munich, Germany.
    10. Ross D. Milbourne & Douglas D. & W. David Scoones, 1989. "Unemployment Insurance and Unemployment Dynamics," Working Papers 750, Queen's University, Department of Economics.
    11. Ham, John C & Rea, Samuel A, Jr, 1987. "Unemployment Insurance and Male Unemployment Duration in Canada," Journal of Labor Economics, University of Chicago Press, vol. 5(3), pages 325-53, July.
    12. 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..
    13. Setterfield, M.A. & Gordon, D.V. & Osberg, L., 1990. "Searching For A Will O'The Wisp: An Empirical Study Of The Nairu In Canada," Department of Economics at Dalhousie University working papers archive 90-04, Dalhousie, Department of Economics.
    14. Jaeger, Albert & Parkinson, Martin, 1994. "Some evidence on hysteresis in unemployment rates," European Economic Review, Elsevier, vol. 38(2), pages 329-342, February.
    15. Eswar Prasad, 1993. "Labor Market Aspects of Industrial Restructuring in Canada," IMF Working Papers 93/91, International Monetary Fund.
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