The labour market dynamics of unemployment rates in Canada and the United States

We develop a framework for the dynamic analysis of unemployment and use it to examine the difference in unemployment rates between Canada and the United States over the period 1980-1993. An examination of both the incidence and the duration of unemployment uncovers a series of stylized Pacts that explanations of persistently higher Canadian unemployment rates should recognize. Cyclical variations in the unemployment rate differential are due about equally to relative changes in spell duration and incidence. A decrease in the incidence of unemployment in the US relative to Canada is the major factor determining the trend in the unemployment rate gap. Finally, while the composition of unemployment is very different between the two countries - permanent job loss being more important in Canada and labour market entry and re-entry more important in the US - these differences are not the cause of longer spell lengths in Canada. Unemployment spells last longer in Canada for all groups of unemployed regardless of reason for unemployment.