The author would like to thank Dan Citrin and Yusuke Horiguchi for helpful comments and suggestions; and Michael Mered and Fredesvinda Pham for important contributions to the research.
Friedman, M., 1968, “The Role of Monetary Policy, “American Economic Review, Vol. 58, No. 1, pp. 1-17.
See, for example, Bean, C.R., P.R.G. Layard and S.J. Nickell, 1986, “The Rise in Unemployment: A Multicountry Study,” Economica, Vol. 53, supplement, pp. S1-S22. For an international comparison of developments in nonwage labor costs as a percent of wages and salaries from the mid-1960s, see Table 5 in Chan-Lee, J.H., D.T. Coe, and M. Prywes, 1987, “Microeconomic Changes and Macroeconomic Wage Disinflation in the 1980s,” OECD Economic Studies, No. 8, pp. 121-157.
See Lillien, D.M., 1982, “Sectoral Shifts and Cyclical Unemployment,” Journal of Political Economy, Vol. 90, No. 4, pp. 777-793; and Samson, L., 1985, “A Study of the Impact of Sectoral Shifts on Aggregate Unemployment in Canada,” Canadian Journal of Economics, Vol. 18, No. 3, pp. 518-530.
Ford, R. and D.E. Rose, 1988, “Estimates of the NAIRU Using an extended Okun’s Law”, Bank of Canada Working Paper, forthcoming.
Empirical studies of the natural rate in Canada are discussed in Rose, D.E., 1988, “The NAIRU in Canada: Concepts, Determinants and Estimates,” Bank of Canada Technical Report No. 50, December.
See, for example, Lindbeck, A. and D.J. Snower, 1988, “Cooperation, Harassment, and Involuntary Unemployment: An Insider-Outsider Approach,” American Economic Review, Vol. 78, No. 1, pp. 167-188; and Blanchard, 0. and L.H. Summers, 1988, “Hysteresis and the European Unemployment Problem,” in R. Cross (ed.), 1988, Unemployment, Hysteresis & the Natural Rate Hypothesis, Oxford: Basil Blackwell.
See Milbourne, R.D., D.D. Purvis, and W.D. Scoones, 1988, “Unemployment Insurance, Unemployment Dynamics and the Natural Rate(s),” Queens University, mimeo, October; and Coe, D.T., 1988, “Hysteresis Effects in Aggregate Wage Equations,” in Cross, op. cit., pp. 285-305.
The following discussion is based on Green, C. and J.-M. Cousineau, 1976, Unemployment in Canada: The Impact of Unemployment Insurance, Economic Council of Canada; Milbourne, et al., op. cit.; and Ashenfelter, 0. and D. Card, 1986, “Why Have Employment Rates in Canada and the U.S. Diverged?” NBER Working Paper, No. 1840, February.
The UI system is administered in 48 regions rather than 10 provinces used in the claculations presented here.
If either the difference or the ratio of MAXB and MINQ are used as the adjustment factor, the estimation results are very similar.
The sensitivity of natural rate estimates to alternative methodologies and data is discussed in Pelletier, J., 1988, “Estimations du NAIRU avec la Courbe de Phillips,” Bank of Canada Working Paper, forthcoming.
For a review of the empirical literature see Rose, op. cit.
When alternative lag specifications gave conflicting signals as to the significance of specific variables, for example because of multicollinearity between the relatively large number of explanatory variables, preference was given to keeping in structural variables.
Variables expressed as the logarithms of ratios have been multiplied by 100 so that all variables are entered in what are effectively percentage terms. UIRR and TAXSIP are entered as two-period moving averages. Data sources are as follows: The unemployment insurance replacement rate adjusted for coverage, minimum wages, and commercial wages are from the Bank of Canada. The average rate for employers’ contributions (employers’ contributions for social security and pension funds as a percent of total wages and salaries) is from OECD Standardized National Accounts and is interpolated from annual data. The percent of the labor force which is unionized is from the Directory of Labor Organizations in Canada and is interpolated from annual data; the 1979 observation is not available and was set equal to the average of 1978 and 1980. All other data are from CANSIM.
That is, the lag distribution initially resembles a third-order polynomial, with the peak in the third quarter, before asymtotically approaching zero.
When the squares of the quadratic gap variable were added to the equation, in order to test for nonlinearities, its estimated coefficient was marginally significant but there was little difference in the overall estimation results. Using a linear trend with a break in 1973, rather than a quadratic trend, also had little overall effect although the significance of the estimated coefficient on the unemployment replacement rate was reduced somewhat.
The impact of these types of supply shock variables were incorporated in the calculations of the NAIRU in Canada in Adams, C., P.R. Fenton, and F. Larsen, 1987, “Potential Output in Major Industrial Countries,” Staff Studies for the World Economic Outlook, August, pp. 1-38.
Entering separate tax rates for employers’ contributions for social security and for pension funds resulted in significant estimated coefficients of almost identical magnitude on each variable but had little impact on the overall regression results. The significance, but not the sign, of the estimated coefficients on relative minimum wages and the replacement rate was sensitive to the inclusion of the employers contribution variable.
The smaller estimated coefficient on the UIRR variable in equation 1 compared to equations 2-4 reflects the fact that the adjustment factor for qualifying and benefit periods increases the level and variance of the UIRR variable, cf. Chart 2.
Increased dispersion across industries may be a proxy for occupational mobility tending to decrease the natural rate, whereas increased dispersion across provinces may represent a proxy for structural changes tending to increase the natural rate.
See Kmenta, J., 1971, Elements of Econometrics, MacMillan, p. 444.
See Rose, op. cit., and the references cited therein. The higher estimate in Chart 3 is based on sample period averages for the cyclical and supply shock variables. If the average relative price of energy from 1979-88 were used instead of the sample period average, the estimate of the level of the natural rate would be correspondingly higher.
See, for example, Rose, op. cit.
The estimation results suggest, for example, that each of the following policies might contribute to lowering the natural rate by about one half percentage points in the 1989 to 1993 period: continued gradual declines in relative minimum wages at the same rate as occurred on average from the mid 1970s to 1988; the elimination of regional extended benefits for unemployment insurance benefits; or the gradual reduction in payroll taxes to about their 1982 level.