Unemployment Persistence and Costly Adjustment of Labour: A Canada-US Comparison

Research aimed at explaining the greater persistence of unemployment in European countries relative to the US has found higher employment adjustment costs in Europe to be a significant contributing factor. This paper explores the potential for costly adjustment of labour to explain at least some of the persistence in Canadian unemployment rates relative to US rates. In contrast to what one might expect, our results suggest that relative adjustment costs are very similar in both countries, as are the speeds of adjustment of labour demand. These findings suggest that employment adjustment costs are not a leading candidate to account for the greater persistence of unemployment in Canada relative to the US.