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Prepared by Alun Thomas.
The industry affiliation of each individual is defined as the industry of the last job held. Data on unemployment rates across industries are not available prior to 1976.
In 1977, the unemployment insurance system was amended to include a variable entrance requirement for benefits which depends on the local unemployment rate. Moreover, the criterion for the duration of regional extended benefits changed from the differential between the regional unemployment rate and the national rate to the differential between the regional unemployment rate and a threshold level. In June 1996, the Employment Insurance Act was passed incorporating changes to the calculation of benefits. This act legislated that beginning in July 1996, benefits would be based on earnings in the last 26 weeks prior to becoming unemployed divided by 14 to 22 depending on the unemployment rate in the claimant’s region. Before the reform, claimants in areas of high unemployment could receive benefits based on average earnings over 12 weeks of work.
This index is based on an analysis of individual behavior at the kink points of an efficient income-unemployment frontier. The index is a nonlinear function of the minimum number of weeks needed to qualify for unemployment benefits, the duration of benefits for individuals who have satisfied the minimum eligibility requirement, and the replacement rate.
The source for this measure of union density is the Directory of Labor Organization in Canada. The data made available under the Corporations and Labour Union Return Act indicates that union density has risen more moderately over the same period.
Dummies were included because of a break in the employment data in 1975.
In early 1996 new legislation decoupled the link between the payroll tax rate and the business cycle. To capture this recent change in determining the payroll tax rate, feedback effects from changes in employment to the payroll tax rate are ignored in the simulations presented below.
The choice of lag length for estimation purposes is always a subjective issue. In this paper each equation was estimated with two lags for each variable. This choice was based on averaging the variety of optimal lag lengths identified by the Schwarz-Bayes and Akaike criterion for the system of equations (Table 5). In an OLS regression of nonstationary variables the standard estimate of the variance-covariance matrix is invalid because the off- diagonal elements are nonzero. Therefore it is necessary to use a Generalized Method of Moments estimator which eliminates the autocorrelations on the off-diagonal of the variance- covariance matrix. Table 6 presents the estimated coefficients of the system and indicates statistical inference based on t-statistics corrected for autocorrelation.
One thousand replications were conducted and averaged. The coefficient estimates in the payroll tax equation were converted into level effects to maintain consistency with the other equation specifications.
This is because of the assumption that it enters contemporaneously into the wage equation.