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Working Paper Summaries (WP/93/55 - WP/93/95)
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Summary of WP/93/94: “Endogeneity in Structural Unemployment Equations: The Case of Canada”

Author(s):
International Monetary Fund
Published Date:
January 1994
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This paper examines the endogeneity of several structural variables that enter unemployment rate equations--the generosity of unemployment benefits, nonwage labor costs, the relative minimum wage, and the degree of unionization. The paper develops arguments explaining why the structural variables are endogenous in the context of the Canadian institutional setting and provides evidence of reverse causality in the form of Granger and Geweke causality tests. The structural unemployment rate equation is then estimated using instruments suggested by the structure of the Canadian labor market. The paper confirms the earlier finding (Coe, 1990) that the generosity of unemployment benefits, nonwage labor costs, and the relative minimum wage have a significant positive impact on the unemployment rate, but fails to find an effect for the degree of unionization. The results indicate that nonwage labor costs and the minimum wage have a powerful impact on the unemployment rate, while the generosity of unemployment benefits has a relatively small impact.

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