Appendix I: Data Sources
Geweke, J., R. Meese, and W. Dent, “Comparing Alternative Tests of Causality in Temporal Systems,” Journal of Econometrics. V. 21 (1983).
Ms. Van Rijckeghem was an economist in the Western Hemisphere Department when this paper was prepared. She is now in the Fiscal Affairs Department. She wishes to thank David Wong for assistance in running causality tests, Renee Ruivivar for research assistance, David Coe, Tarhan Feyzioglu, Jorge Márquez-Ruarte, Eswar Prasad, and Murat Ucer for helpful comments and suggestions, Robert Billings (Finance Canada), Craig Chamberlin (Labor Canada), Stuart McLeod (Statistics Canada), Ron Parker (Bank of Canada), and Cathy Wright (IMF) for kindly providing data.
Coe, David, “Structural Determinants of the Natural Rate of Unemployment in Canada,” Staff Papers, International Monetary Fund (Washington), (March 1990).
Premiums were raised by 24 percent in July 1991 and by 7 percent in January 1992. Since 1989 premium rates were increased by more than 50 percent.
The replacement rate is defined as maximum weekly benefits divided by average hourly earnings. Maximum weekly benefits are 60 percent of maximum insurable earnings (Canadian policy defines maximum insurable earnings as the two-year lag of a moving average of the growth in average earnings). Coverage is defined as the number of workers covered by unemployment insurance divided by the labor force.
Coe’s study contains equations which express MINQi and MAXBi as functions of regional unemployment rates for the period up to 1990.
The generosity in terms of qualification period and duration of benefits also changed in 1978. The duration of benefits was decreased at unemployment rates below 8 percent, and increased for rates above 8 percent.
System of National Accounts definition.
For example, in 1986 the Government felt that increases in premiums proposed by the Commission would put the emerging recovery at risk. Also, in 1987, the Government wanted to ensure that the difficulties experienced as the result of the stock market crash were not compounded by increases in premiums.
As a rule of thumb, the Canadian authorities estimate that each 1 percentage point increase in the unemployment rate leads to an increase of almost 0.3 percentage points in the employee premium rate.
It is understood that the unemployment rate is endogenous and that its coefficient will be biased.
A composite regression of nonwage labor costs directly on its own lag, the cumulative surplus, trend variables, and a dummy produces a t-statistic of only 1.4 for the cumulative surplus (see Table 2, bottom of panel 3). This is still satisfactory in light of the theoretical framework and the regressions reported above so that the cumulative surplus is maintained as an instrument.
Lagging TAXSIP a few quarters will not in general remove its dependence on the contemporaneous unemployment rate. Concretely, during each quarter of a given year, say 1985, TAXSIP will depend on the forecast for unemployment for that year E(UR1985). Lagging TAXSIP one quarter will not eliminate the dependence from the unemployment forecast for the year (except in the case of the first quarter). For example, in the second quarter of 1985, lagged TAXSIP (first quarter 1985) will still be related to the unemployment projection for 1985 and therefore to the second quarter’s unemployment rate (quarterly and annual unemployment rates are highly correlated).
Recall the result that the quarterly unemployment rate is well explained by the annual unemployment rate.
While the degree of unionization is very high in public administration (80 percent) its employment share is only 7 percent.
The Canada Labor Union Reporting Act. CALURA data are not available after 1989. Membership for 1990 and 1991 was held constant at the 1989 level.
The difference between the adjusted %UNION and %UNION is explained in a regression on a constant (-.9; t=-19.9) and the unemployment rate (.11; t-20.5).
CALURA is probably a preferable source because data-reporting is compulsory under the financial reporting legislation of the CALURA act (applicable to unions with membership above 100). DLO is simply a directory providing names, addresses, and membership of all union federations and of independent local unions with 50 members or more; unions voluntarily update forms sent to them. Two other concerns with the DLO data are: the lack of updating, and double counting (e.g., when unions change affiliation both the old and the new federation report the union as a member). A Canadian official noted that the increase in the unionization rate reported by DLO for 1991 reflects the addition of previously existing unions to the records, and that the unionization rate probably has not changed since 1989.
The tests are based on untransformed variables (no moving averages or lags are taken).
In the case of UIRR, %UNION, %UNION2, the other variables consist only of trends (linear and quadratic) for lack of further information on their structural determinants. In the case UIRRadj, UIRR was included in addition to trends, while in the case of TAXSIP the cumulative surplus in the unemployment insurance account (lagged one year) was included. RELMW was expressed only in terms of trends, as its known determinants, Σtdt*URt and Σtdt, are correlated with the unemployment rate.
The Sims test does not include the lags of the dependent variable, in this case the 4 lags of the unemployment rate.
In addition all explanatory variables from Coe’s equation are included, though all structural variables are lagged once to reduce the probability of simultaneity bias.
The lagged unemployment rate does not have a significant effect on %TAXSIP when trend and quadratic trend are included. However, when the quadratic trend is dropped from the equation, the lagged unemployment rate does have a significant impact on %TAXSIP.
The significance level under the Geweke test is 18 percent for UIRRadj. This is considered acceptable however, given a significance level of 7 percent under the Granger test.
One is led to ask why DLO data would be more cyclical than CALURA data. This could be related to the fact that DLO data include smaller firms, so that membership will fall more steeply in a recession than in the case of CALURA data (both sources have similar denominators, see data appendix).
UIRR and TAXSIP are introduced as two-period moving averages.
The output gap is defined as the difference between log(GDP) and the fit of log(GDP) from an equation which regresses log(GDP) against a quadratic trend for the period 1961:1-1991:4.
These results are broadly equal to those first obtained by Coe (1990). Small differences are attributable to data revisions.
The cyclically neutral value for the output gap is defined as the average of two estimates: (1) the sample average of the output gap, and (2) its mean value between 87:2 and 88:2, a period of full employment. This procedure follows Coe (1991).
Defined as the change in each structural variable since 1971, multiplied by the value of the long-run multiplier.
In Coe’s study the observed increase in TAXSIP contributes 2 ½ percentage points to the 3 ½ percentage-point increase in the natural rate over the period 1970-88. Unemployment insurance generosity and unionization each contribute 1 percent to the increase in the natural rate, while the decline in the relative minimum wage over the period contributes one point to the decline in the natural rate.