The Canadian Labor Market - Developments, Prospects, and Policy

The Canadian Labor Market: Developments, Prospects, and Policy
by Eswar Prasad

Since early 1990, the aggregate unemployment rate in Canada has risen
by about 4 percentage points and, despite the recent cyclical rebound in
output, has remained in a range close to 10 1/2 percent. The persistence of
a high unemployment rate and subdued employment growth in this recovery
relative to previous postwar recoveries suggests that there have been
fundamental changes in the structure and functioning of the Canadian labor
market. This paper seeks to shed some light on these developments by
examining Canadian labor market data that are disaggregated by industry,
skill level, province, and demographic classifications. The analysis
corroborates a growing body of evidence that the increase in unemployment in
Canada in the 1990s partly reflects an increase in the persistent or
structural component of unemployment.

Some important structural problems that contribute to labor market
rigidity are identified and described. Skill and geographical mismatch in
the labor market as well as the unemployment insurance (UI) system appear to
be important factors contributing to structural unemployment. Changes to
the UI system recently proposed by the Government are briefly described,
followed by an examination of various proposals for more fundamental UI
reform. This paper then identifies some particularly vulnerable groups in
the labor force--youth, unskilled workers, older dislocated workers, and
immigrants. Active labor market measures that could foster their
integration into the labor force and their absorption into employment are

The paper concludes that measures to remove structural distortions to
labor supply and reduce job mismatch are necessary in order to significantly
reduce structural unemployment and enhance the long-term growth prospects of
the Canadian economy.