Increased Earnings Inequality and Macroeconomic Performance: the case of Canada in the 1980s

This paper provides an empirical analysis of the increase in earnings inequality and the relationship to macroeconomic conditions, in Canada, during the 1980s. Regression results presented here indicate that a positive and uniform relationship between the unemployment rate and earnings inequality existed through the period 1981 to 1989. These results contrast with recent findings that the unemployment-inequality relationship weakened in the late 1980s in other liberal economies, such as the US and UK. The main policy implication is that stimulative macroeconomic policy remains a relevant policy instrument in Canada and, more generally, that institutions, such as the degree of unionization, and policies, such as minimum wages, may partially explain differences in the pattern of inequality among countries.