Provincial Unemployment Rate Disparities: Revisited

Abstract

Empirical studies of the influence of UJ generosity on unemployment rates face an ongoing problem with endogeneity of the UJ generosity variable. This occurs for two reasons. First, the replacement ratio will likely increase in a recession as the more remunerative but exposed jobs are laid off. Second, the ratio of the maximum duration of benefits to the minimum work requirement (a component of UJ generosity) will both increase in a recession and be higher in the high unemployment regions (see Osberg 1995). This issue can be nominally addressed by using lagged values of Ul generosity as instruments. However, with so much serial correlation in the time series data, this may not solve the problem. The purpose of this note is to estimate the impact of Ul generosity on provincial unemployment rate disparities while miminizing this problem. The crux of the issue is that the weighted standard deviation of unemployment rate disparities moves pro-cyclically, whereas Ul generosity moves counter-cyclically. When the standard deviation of unemployment rate disparities is the dependent variable and Ul generosity is an explanatory variable, any residual endogeneity of UJ generosity would tend to bias its coefficient in the negative direction. Thus, it should be harder to show a positive relation between Ul and unemployment rate disparities; but if we can show one, we should have more confidence in it.