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Unemployment Fluctuations in a Small Open-Economy Model with Segmented Labour Markets: The Case of Canada

Yahong Zhang ()

Staff Working Papers from Bank of Canada

Abstract: The recent financial crisis and subsequent recession have spurred great interest in the sources of unemployment fluctuations. Previous studies predominantly assume a single economy-wide labour market, and therefore abstract from differences across sector-specific labour markets in the economy. In Canada, such differences are substantial. From 1991 to 2010, employment in the tradable sector is almost three times as volatile as that in the non-tradable sector, and wages are about twice as volatile. To capture the labour market differences at the sectoral level, I introduce a segmented labour market structure to a medium-scale dynamic stochastic general-equilibrium model with financial and labour market frictions and estimate the model using Canadian data from 1991 to 2010. I find that, in the long run, unemployment fluctuations are mainly driven by the shocks to firms’ net worth and production technology in the non-tradable sector and the shocks to the foreign interest rate. In the short run, however, it is the shocks to firms’ net worth in the tradable sector that account for about 50 per cent of unemployment fluctuations. I also find that inclusion of the recent financial crisis data in the estimation is crucial for assessing the effects of the financial wealth shocks.

Keywords: Business fluctuations and cycles; Economic models; Labour markets (search for similar items in EconPapers)
JEL-codes: E32 E44 J6 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013
New Economics Papers: this item is included in nep-dge, nep-lab, nep-lma and nep-mac
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Journal Article: Unemployment fluctuations in a small open-economy model with segmented labour markets: The case of Canada (2018) Downloads
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