Persistence of Unemployment in the Canadian Provinces

We analyze the degree of persistence of the unemployment rates of the 10 Canadian provinces using quarterly data for the period 1976:1-2005:4. We apply a two-break minimum Lagrange Multiplier unit root statistic, which, unlike standard unit root statistics (without or with breaks), makes it possible to find the stationarity of the different unemployment rates, giving support to the theory of the natural rate. We use the methodology of Bai and Perron (1998, 2003) to estimate a linear model with multiple structural changes to estimate the different degrees of persistence over the different regimes. The results suggest that the degree of persistence decreases when multiple breaks are allowed. Issues regarding the Canadian labor market, the insurance benefits program, inter-provincial transfers, and inter-provincial mobility are discussed as potential explanations for he results.

Keywords
Break Dates, Canadian Provinces, Persistence, Unemployment, Unit Root

JEL Classification

C22, C52, R11