An Econometric Examination of the Trend Unemployment Rate in Canada

This paper attempts to identify the trend unemployment rate, an empirical concept, using cointegration theory. The authors examine whether there is a cointegrating relationship between the observed unemployment rate and various structural factors, focussing neither on the non-accelerating-inflation rate of unemployment (NAIRU) nor on the natural rate of unemployment, but rather on the trend unemployment rate, which they define in terms of cointegration. They show that, given the non-stationary nature of the data, cointegration represents a necessary condition for analysing the NAIRU and the natural rate but not a sufficient condition for defining them. The main finding of the study is that two structural factors—the degree of unionization of the labour force and payroll taxes—can best account for the stochastic trend in the Canadian unemployment rate from 1955 to 1994. Accordingly, deviations of the observed unemployment rate from the trend unemployment rate during that period are treated as containing information relevant for measuring the output gap within the multivariate filter.