UNEMPLOYMENT-INSURANCE AND UNEMPLOYMENT DYNAMICS

One of the puzzling features of the recent behaviour of the Canadian unemployment rate is its persistence in the presence of a sustained expansion in real national income. Neither deficient aggregate demand nor a once-for-all, supply-side induced increase in the natural rate provides a convincing explanation of this phenomenon. This paper presents a model which explains how aspects of unemployment insurance in Canada will cause persistence: unemployment will be highly serially correlated even if output is not. We document the increased persistence of the unemployment rate since 1977, and we show that the model accounts for much of this phenomenon. -Authors