I've written about differences in the Canadian and U.S. labor markets before; see here. I see that Steve Williamson has recently chimed in as well with this: Why are Canadians Working so Much More than Americans?
Now consider creating a new country consisting of U.S. border states: Washington, Montana, North Dakota, Minnesota, Wisconsin, Michigan, Ohio, New York, Vermont, New Hampshire and Maine (I exclude Alaska, Idaho, and Pennsylvania). If we were to combine these border states with Canada, the region of interest would look roughly like this (map is a little off, but you get the idea):
The question is this: Would you expect the labor market in the U.S. border states to look more like the Canadian labor market or more like the U.S. labor market?
There is good reason to believe, I think, that the demographics across the two countries are pretty similar (though certainly not identical). If the type of economic activity along the border is roughly similar across the two countries, then one might reasonably expect similar labor market behavior in Canada and the border states. But this is not what we see at all.
Here is a plot of the participation rate (employment plus unemployment as a ratio of the working age population):
The U.S. border states look a lot more like the rest of the U.S. and not like Canada at all. Here is a plot of the employment rate (employment as a ratio of the working age population):
Once again, the border states look more like the U.S. in general, rather than Canada.
A preliminary conclusion is as follows: [1] If Canada-U.S. demographics are roughly similar; and [2] if U.S. border states are roughly similar to their Canadian counterparts in terms of sectoral composition; then the differences we observe between the two countries (in terms of labor market activity) are quite possibly driven by policy differences.
Exactly what sort of policy differences we are talking about here remains an open question.
A question that interested me is to what extent this cross-country difference is driven by regional considerations. That is, we know that most of the Canadian population lives and works near the U.S. border (the 49th parallel):
The question is this: Would you expect the labor market in the U.S. border states to look more like the Canadian labor market or more like the U.S. labor market?
There is good reason to believe, I think, that the demographics across the two countries are pretty similar (though certainly not identical). If the type of economic activity along the border is roughly similar across the two countries, then one might reasonably expect similar labor market behavior in Canada and the border states. But this is not what we see at all.
Here is a plot of the participation rate (employment plus unemployment as a ratio of the working age population):
A preliminary conclusion is as follows: [1] If Canada-U.S. demographics are roughly similar; and [2] if U.S. border states are roughly similar to their Canadian counterparts in terms of sectoral composition; then the differences we observe between the two countries (in terms of labor market activity) are quite possibly driven by policy differences.
Exactly what sort of policy differences we are talking about here remains an open question.
Another option is that the people are just different - as unpopular or unappealing as that may sound, humor me for at least a moment.
ReplyDeleteWe rightly assume that there are policy differences. Well people cause policies, therefore any policy difference is an illustration of a difference among the people. I'd suggest that it would be unrealistic to suppose that *every* difference between the people is manifested into a formal policy. Given such a premise, it follows that there is some difference between the people that cannot be measured in a policy comparison exercise.
Absolutely. But on the other hand, the same people might experiment with different policies, no?
DeleteVery true. In conclusion, the people may or may not be different, and any difference may or may not be evident in the policy differences. This stuff is easy!
DeleteI think you're getting it now ;)
DeleteI don't think the "demographics" across the border are the same, though it's not even clear what you mean by "demographics" in the first place. Are you referring to distributions of age (maybe similar), race (quite different), language (at times very different, especially along the Quebec border), education (different), urban/rural residence (VERY different).
ReplyDeleteYou might be interested in the 2003 Michael Adams book Fire & Ice about demographics differences between the two countries.
Also, anecdotally, I think most Canadians would tell you the world feels very different the minute you cross the border. Indeed even AS you cross the border (when dealing with the border guards).
By demographics, I mean primarily "age and sex."
DeleteYes, I do feel the difference even at the border (I am Canadian).
Yet, despite these differences, the behavior of the two labor markets are quite similar in the early part of the sample. What accounts for this similarity, if the "demographics" are so different?
Good detective work. I don't know what would explain the differences, but am wondering if Quebec and Ontario would look more like the US than Western Canada would. If so, maybe we could explain this by a decline in the manufacturing sector?
ReplyDeleteThat thought occurred to me JP, in particular, comparing Ontario with (say) Michigan. My initial impression is that significant differences remain, but I will report more formally on this later. Thanks!
DeleteAnd the effect of policies can be seen in the years of the "Great Canadian Slump" when the Bank of Canada was trying its best to send the economy into the ground.
ReplyDeleteJacques, there was some debate about the role of monetary policy; see here:http://www.jstor.org/discover/10.2307/136206?uid=3739744&uid=2&uid=4&uid=3739256&sid=21103770758923
DeleteAs a result of the recession and the housing bubble, The US economy was loosing thousands of jobs every month so they had to compensate for that by extending and increasing unemployment benefits which by itself causes unemployment rate to stay low. If you look at some European countries like Belgium who has the largest rates of unemployment benefits, the unemployment rate is very high. The reason why the recovery was not a job boosting recovery is because of the extension of unemployment benefits. Maybe it seems like Canadians are working more but it is simply because they have more incentive to do so than American workers.
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