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

Stephen Poloz
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Stephen Poloz: Bank of Canada

Staff Working Papers from Bank of Canada

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. 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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