Cyclical behavior of unemployment and job vacancies: A comparison between Canada and the United States

As long as workers do not value their leisure much, the Mortensen-Pissarides search and matching model implies that unemployment and job vacancies would be much less responsive to changes in labor productivity than what we observe in the business cycles of the Canadian labor market. These findings parallel the work of Shimer (2005) for the United States. The combined data from both countries present an additional difficulty for the model. Even if the unobserved value of leisure is allowed to be as high as required to fit the business cycle in the United States or in Canada, as proposed by Hagedorn and Manovskii (2007), another failure arises. The model lacks ability to reconcile the similar labor cycles with the large policy differences in the UI benefits and income taxes in the two countries when the value of leisure is assumed to be the same in both countries.