An Estimate of Income on a Full Employment Path for the Quebec Economy

Abstract

An Estimate of Income on a Full Employment Path for the Quebec Economy. The paper presents an estimation of the potential output of the Quebec economy for the period 194667. The estimation procedure is a modified version of a method developed by E. Kuh. We used annual data and thus the steady state of this method. The effect over time of employment conditions on the supply of labour is taken into account; hence, in a given year t, the potential output is not obtained by a mere adjustment of the amount of labour employed towards its full employment value. The technique used incorporates the dynamic effect, on the current labour supply, of the maintenance of full employment in the past. Therefore, the potential output in year t lies on a path along which full employment is always maintained. Because of a lack of data, we have encountered many estimation problems. The results are thus subject to a number of qualifications. The major problems we had to face were: specification errors, errors in the variables and bias due to the estimation method used. The estimates are based on data from the private sector exclusive of agriculture. We use a Cobb-Douglas type production function assuming disembodied neutral technical progress. A time trend captures the influence of the technical progress as well as that of the capital stock. The participation rates equation is based on a dynamic scheme which shows the influence of current and last year employment conditions on participation; a time trend is added to take into account structural changes (such as a substantial increase in female participation rates). This equation is then combined with the full employment constraint to derive the potential employment series using an unemployment rate of 4 per cent as a reasonable target (for the Quebec economy). The potential employment series is introduced in the production function to obtain the potential output path. The results suggest that the cost of unemployment in terms of unproduced output over, say, the last ten years is substantial for the Quebec economy.