Why Have Unemployment Rates in Canada and the U.S. Diverged?

46 Pages Posted: 5 Jul 2004 Last revised: 14 Jul 2010

See all articles by Orley Ashenfelter

Orley Ashenfelter

Princeton University - Industrial Relations Section; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

David Card

University of California, Berkeley - Department of Economics; Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)

Date Written: February 1986

Abstract

Throughout 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.

Suggested Citation

Ashenfelter, Orley C. and Card, David E., Why Have Unemployment Rates in Canada and the U.S. Diverged? (February 1986). NBER Working Paper No. w1840. Available at SSRN: https://ssrn.com/abstract=341808

Orley C. Ashenfelter (Contact Author)

Princeton University - Industrial Relations Section ( email )

Princeton, NJ 08544-2098
United States
609-258-4040 (Phone)
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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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David E. Card

University of California, Berkeley - Department of Economics ( email )

Room 3880
Berkeley, CA 94720-3880
United States
510-642-5222 (Phone)
510-643-7042 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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