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Government policies, unemployment rates, and interprovincial migration in Canada

University of British Columbia

Because the process of interprovincial labour migration is an important interregional adjustment mechanism, a better understanding of it can help us to understand the causes of regional disparities in incomes and unemployment rates. This thesis focuses on two issues involving interprovincial migration in Canada: the effect of government policies on migration, or fiscally-induced migration; and the effect of unemployment rates on migration. Though other economists have examined these issues, the empirical evidence obtained to date remains inconclusive. In chapter II of the thesis a multinomial logit model of interprovincial migration is developed, in which individuals are assumed to choose the province which maximizes their indirect utility. Two versions of the model are considered: a perfect certainty version in which individuals face no uncertainty about employment at each possible destination, and an expected utility version in which individuals face a nonzero probability of being unemployed. In both versions of the model per capita provincial government spending enters the utility function directly, while provincial income tax rates and transfer payments enter the model through the budget constraint. This treatment of fiscal variables contrasts with that of other studies, most of which have either replaced provincial government spending variables with government revenue variables such as intergovernmental transfer payments, or employed a measure of net fiscal benefits. After consideration of the assumptions necessary to adapt the model for use with aggregate rather than individual data, it is estimated in log-odds form using the generalized least squares method of Parks (1980). Annual aggregate data for the period 1962 to 1981 are used. As far as both government variables and the unemployment rate are concerned, the empirical results are far more conclusive than those obtained elsewhere. Total per capita spending by provincial and local governments is shown to have a significant positive effect on interprovincial migration. Higher levels of per capita spending on health and education in province j will also encourage in-migration to province j, but higher levels of spending on social services will reduce in-migration. These results imply that intergovernmental transfer payments, which allow provincial governments to increase expenditures without raising taxes, have the potential to influence migration decisions in Canada. However, since not all types of government spending have the same effect on migration, the exact impact of intergovernmental transfer payments will depend on how they affect the composition of provincial government spending. Other fiscal variables such as provincial government income tax rates and unemployment insurance benefits do not enter the estimating equations independently of other variables in the model. However, this does not prevent them from having a significant impact on interprovincial migration as well. The unemployment rate, which appears only in the expected utility version of the model, also proves to have a significant effect on migration. The results indicate that other things being equal, individuals will prefer to move to provinces with lower unemployment rates. Further testing of the model revealed a few problems. The parameter estimates are sensitive to the choice of denominator for the log-odds ratio and are unstable over time. Also, the model does not predict well during the sample period. The latter problem can be traced to the relative lack of intertemporal variation in the migration data. The poor within- sample predictive power does not invalidate the earlier conclusions, but it does mean that no particular weight should be attached to the actual numerical values of the parameter estimates.

Text

2010-10-11

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http://hdl.handle.net/2429/29084

Economics

University of British Columbia

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