Small Differences that Matter: Labor Markets and Income Maintenance in Canada and the United States.

Marcis, John G.

The United States and Canada are as similar economically, demographically and socially as any two countries in the world. Because of these similarities, a program that works in one country is likely to work in the other. Consequently, public policy debates within the U.S. and Canada often refer to the experiences of the other country to either support or oppose specific policy initiatives. The two countries, however, chose different strategies for coping with the economic problems of the 1980s. The U.S. chose a market-driven strategy while Canada pursued a more activist social strategy.

The seven papers in this volume are research contributions from a comparative project on the United States and Canada organized by the National Bureau of Economic Research and supported by the William H. Donner Foundation of New York. The papers follow a similar methodology in that they each use detailed microdata on thousands of individuals in Canada (Statistics Canada data) and/or the U.S. (Bureau of the Census data). The seven chapters were written independently and can be read independently.

The editors, David Card and Richard B. Freeman, provide a solid foundation for the papers with an "Introduction" that emphasizes the theme that although major similarities between the United States and Canada exist, "small differences" in labor policies and labor institutions significantly influenced income inequality and labor market experiences during the 1980s. The editors attribute this finding to two phenomena. First, individuals and institutions respond in economically significant ways to incentives. For example, subtle differences in national immigration policies have resulted in differences in the skill levels of those who self-select to migrate. Second, there appears to be an "interaction" effect between specific small differences so that the sum of the small differences is greater than the individual small differences taken separately. For example, differing trends in female labor force participation rates between the two countries and differing trends in union membership rates between the two countries contributed to the divergence in earnings inequality between the U.S. and Canada.

Three papers begin with differences in specific policies and examine how they have generated different economic outcomes. George J. Borjas (Chapter 1) examines and compares immigration policies of the United States and Canada. Prior to the early 1960s, both countries used a national-origin quota system to allocate the scarce number of visas among the many applicants (preferring persons originating in northwestern European countries). During the 1960s, both countries enacted major changes in immigration policy. The U.S. began to award entry permits on the basis of the applicant's family ties with American residents, while Canada began to allocate visas on the basis of the applicant's observable socioeconomic characteristics and specific skills. Borjas's research indicates that the Canadian approach produces a more skilled flow of immigrants than the United States' family-unification approach because it is structured to favor immigrants from the industrialized European countries.

Unemployment rose more in Canada than in the United States during the 1980s. Daniel Card and W. Craig Riddell (Chapter 5) investigate whether the relatively more generous unemployment insurance system in Canada led to higher reported unemployment in Canada. Their empirical analysis suggests that approximately 75 percent of the difference in unemployment rates between the two countries in the 1980s is attributable to the manner in which nonwork time is classified. In the U.S., unemployment insurance eligibility requires 20 weeks of employment in most states. The Canadian unemployment insurance system allows individuals with 10-12 weeks of employment to qualify. Hence, individuals who are not working in Canada are more likely to be classified as unemployed. Card and Riddell report that Canadian workers have increasingly tailored their labor supply behavior to changes in the Canadian unemployment insurance system. This effect is more pronounced for males than for females.

Rebecca M. Blank and Maria J. Hanratty (Chapter 6) report on the income maintenance (transfer) programs in the United States and Canada. Canada has a tradition of non-means-tested transfer programs. The Canadian system offers both higher benefit levels and broader eligibility than the U.S. system. Consequently, the Canadian system offers greater protection against poverty. Blank and Hanratty conduct an interesting simulation exercise whereby Canada's transfer system is applied to the U.S. (that is, Americans receive the transfers they would be entitled to under Canadian rules and benefits, all other things remaining the same). The authors find in the simulation exercise that the Canadian transfer system would essentially eliminate poverty among children in the U.S.

Three papers begin with differences in outcomes and relate those differences to policies, economic shocks and the operation of the labor market. Previous studies found educational earnings differentials in the United States widened greatly during the 1980s. Richard B. Freeman and Karen Needles (Chapter 2) examine such differentials for Canada during this decade. The authors found that educational earnings differentials increased less in Canada than in the U.S. Freeman and Needles contend that the major reason for this finding is that the proportion of college graduates in the work force experienced a greater relative growth in Canada than in the U.S. Another interesting finding in this study was that the gender pay differences narrowed in Canada during the 1980s.

Thomas Lemieux (Chapter 3) investigates the effects of unionization on wage inequality in Canada and the United States. Canadian workers were twice as likely to be covered by a collective bargaining agreement in the 1980s as were American workers. Over the same period, wages were more evenly distributed in Canada than in the U.S. Lemieux finds that unions in Canada are similar to those in the U.S. in that they have similar relative wage effects and that private sector unionization rates are highest for workers in the middle of the skill distribution. Differences in the pattern and extent of unionism in Canada and in the U.S. account for approximately 40 percent of the difference in wage inequality of men between the two countries. Less significant results are reported for women.

Between 1920 and 1960 union growth in Canada paralleled that of the United States. Since 1960, however, the two paths have diverged and union membership in Canada now is twice that in the U.S. The purpose of the study by W. Craig Riddell (Chapter 4) is to investigate the difference in union membership between the two countries. Although this study investigates many individual hypotheses concerning differential union growth rates, Riddell concludes that much of the difference can be attributed to intercountry differences in the legal environment of unions and to differences in overt management opposition to unions.

The final study in this collection is by McKinley L. Blackburn and David E. Bloom (Chapter 7). This study investigates several general themes concerning earnings inequality during the 1980s. Blackburn and Bloom find that the rate of growth in average family income was higher in the United States than in Canada and that income inequality among families increased in the U.S. while there was no change in inequality in Canada. Although the authors discuss the changing structure of families as a relatively minor factor leading to differences in family income inequality, they attribute most of the difference to the differential rate of growth of transfer income.

Each study was well-documented and informative. Most of the studies emphasize the role of economic incentives in altering human behavior. The book would be useful reading for policy analysts and for labor economists.

John G. Marcis Francis Marion University