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


  • Stephen S. Poloz

    (Bank of Canada)


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.

Suggested Citation

  • Stephen S. Poloz, "undated". "The Causes of Unemployment in Canada: A Review of the Evidence," Staff Working Papers 94-11, Bank of Canada.
  • Handle: RePEc:bca:bocawp:94-11

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    References listed on IDEAS

    1. Eswar S Prasad, 1993. "Labor Market Aspects of Industrial Restructuring in Canada," IMF Working Papers 93/91, International Monetary Fund.
    2. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
    3. 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 614-637, September.
    4. 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.
    5. 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.
    6. David Card & W. Craig Riddell, 1993. "A Comparative Analysis of Unemployment in Canada and the United States," NBER Chapters,in: Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States, pages 149-190 National Bureau of Economic Research, Inc.
    7. 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.
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    9. 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 325-353, July.
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    11. Phipps, Shelley, 1990. "Quantity-Constrainted Household Responses to UI Reform," Economic Journal, Royal Economic Society, vol. 100(399), pages 124-140, March.
    12. Giersch, Herbert, 1985. "Eurosclerosis," Kiel Discussion Papers 112, Kiel Institute for the World Economy (IfW).
    13. 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 171-195, Supplemen.
    14. 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.
    15. 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 518-530, August.
    16. 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.
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    Cited by:

    1. Lars Osberg, 1996. "Economic Policy Variables and Population Health," Department of Economics at Dalhousie University working papers archive healthy, Dalhousie, Department of Economics.
    2. Robert A. Amano, "undated". "Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand," Staff Working Papers 95-3, Bank of Canada.
    3. Cote, D. & Hostland, D., 1996. "An Econometric Examination of the Trend Unemployment Rate in Canada," Staff Working Papers 96-7, Bank of Canada.

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