Structural breaks and labor market disparities in the Canadian provinces

Abstract

Purpose – The purpose of this paper is to use quarterly time series data from Canada and the Canadian provinces to determine if the unemployment rates in the Canadian provinces are converging to the national rate of unemployment. Design/methodology/approach – First, the authors check for existence of stochastic convergence using recent unit root statistics, see Perron and Rodríguez (2003) and Rodríguez (2007). Second, the authors verify existence of convergence using methods proposed by Volgelsang (1998) and Bai and Perron (1998, 2003). All these methods allows for structural break(s) in the data. Findings – Results from different unit root tests, without and with structural breaks, confirm that stochastic convergence exists in all provinces. The other results show strong evidence that deterministic convergence exists and the unemployment rates of the Canadian provinces are converging to the unemployment rate of Canada. This conclusion is stronger when multiple breaks are allowed in the trend function using the approach of Bai and Perron (1998, 2003). Practical implications – Since the authors have verified the existence of stochastic convergence, any intervention in the labor markets of the Canadian provinces to control the provincial unemployment rate would have a temporary effect and these policies will not have a permanent influence on the unemployment rates. However, existence of β-convergence in the Canadian provinces shows that general policies toward lowering the national unemployment rate would decrease the provincial unemployment rates as well. Originality/value – To the best of the knowledge, the paper attempts to study the unemployment rate convergence in the Canadian provinces using the above-mentioned approaches. These approaches allow the authors to take into consideration the possibility of structural breaks in order to get results that are more accurate.