Christopher Ragan

Precision Targeting: The Economics - and Politics - of Improving Canada’s Inflation-Targeting Framework

The Bank of Canada’s inflation-targeting framework, since its inception in 1991, has proven itself a success. Yet further improvements in the system should be considered seriously for inclusion in a renewed monetary policy agreement, between the Bank of Canada and the federal government, and renewal is due in 2011. Some improvements would deliver genuine economic benefits to millions of Canadians over the years ahead. Lowering the target rate for consumer price inflation in particular would help secure the domestic purchasing power of our financial assets. Such a change, however, should be part of a coherent framework, which addresses financial stability goals and political imperatives.

Progressive Income Taxes and the Substitution Effect of RRSPs

Within a progressive income-tax system, Registered Retirement Saving Plans (RRSPs) generate a substitution effect that decreases saving. The key point made here is that when an RRSP is introduced to a system that taxes capital income, the rate of return on marginal saving within the RRSP is driven to equality with the rate of return on non-RRSP saving. Since RRSP contributions redistribute taxable income across periods, they also have the effect of increasing future marginal income-tax rates, which lowers the after-tax return to saving. This result stands in contrast to the conventional view from the public finance literature.

Job Security and Labour Market Flexibility

This paper discusses the desirability of government-legislated job security. Job security may be beneficial to employed workers, but it can also impose a cost on unemployed workers by lowering labour market turnover and thereby increasing the average duration of unemployment spells. This externality can lead to self-reinforcing behaviour between workers at different firms: If most workers in the economy have job security then turnover will be low and the duration of unemployment following a layoff is likely to be high. As a result, other workers will also desire job security. Even in the absence of legislation, therefore, the externality may result in more job security being provided than is socially desirable.

Employment Adjustment versus Hours Adjustment: Is Job Security Desirable?

Firms can adjust to shocks by laying off and hiring workers or by adjusting the hours worked by each worker. Adjustment of hours provides job security for employed workers. Adjustment of employment generates higher labor market turnover and, thus, better job prospects for the unemployed. Since high turnover lowers the expected cost of being laid off by reducing the expected duration of unemployment, there is a strategic complementarity between firms in the provision of job security. This gives the possibility of multiple equilibria with different amounts of turnover. Copyright 1995 by The London School of Economics and Political Science.

What Now? Addressing the Burden of Canada's Slow-Growth Recovery

The Canadian economy faces serious short-term macroeconomic challenges, the most important of which is addressing the burden of our slow-growth recovery. The sources and consequences of this slow growth are the focus of this Commentary. Canadian monetary policy has little ability to further stimulate Canadian growth. Given the large amount of uncertainty now faced by Canadian firms, further reductions in the policy interest rate are unlikely to be effective in stimulating aggregate demand. In addition, the ongoing problems associated with very low interest rates cannot be ignored and may soon present the Bank of Canada with a compelling case for rate increases. Canadian fiscal authorities have more room to manoeuvre than their counterparts in many other developed countries. Yet there remain solid arguments for budgets to be brought back to balance in the next few years. One is that discretionary fiscal policy is an ineffective pro-growth policy when the economy is not experiencing a sudden collapse of aggregate demand. Another is the longer-term budgetary challenges that Canadian governments will face over the next few decades as a result of population aging. Neither fiscal nor monetary policy is therefore likely to stimulate Canada’s economic growth over the next few years. This lack of stimulus from traditional macroeconomic policy suggests that any pick-up in Canadian growth will rely on a recovery of private demand. Given the lingering uncertainty and the continued slow pace of the global economic recovery, however, a significant rebound in Canadian private demand is unlikely in the near future. High household debt suggests that consumption is an improbable source of near-term growth. An investment revival will require a return of corporate confidence, while a rally in Canadian exports will depend on a strong and sustained foreign recovery. A central conclusion of this Commentary is therefore that Canadian policymakers should accept the continuation of Canada’s slow-growth recovery for the next few years. Slow growth has undesirable consequences, however, including longer unemployment spells, more part-time employment, and a greater incidence of long-term unemployment. Policymakers should focus on addressing the associated burden by enhancing income support for the unemployed, increasing the mobility of workers and improving incentives for labour-market training.

A Risk-Sharing View of Real Wages and Contract Length

This paper models a union and firm choosing between long labor contracts, in which wages are predetermined, and short contracts, in which wages are flexible. It is shown that the union strictly prefers short contracts because it dislikes the greater employment volatility in long contracts. In contrast, the convexity of the firms profit function leads the firm to prefer the greater uncertainty of long contracts. The model predicts that workers are prepared to enter long contracts only if they are compensated with a higher real wage. This prediction is tested using a large sample of Canadian collective agreements, with generally supportive results.

Do Contracts Matter in Canada

This paper empirically examines the view that wage rigidity in long-term labor contracts matters for the behavior of employment. In particular, I follow Bilss (1991) approach, which looks for systematic employment patterns in the first year of long-term contracts. Using a new panel data set which includes annual firm-level employment observations from the Canadian manufacturing sector, I find evidence in many industries that employment over-adjusts to shocks that occur during the contract. My examination of wage dynamics, however, indicates that for those industries in which contracts appear to matter for the behavior of employment, there is little indication that contractual wage rigidity is the source of the over-adjustment of employment.

The Seductive Myth of Canada's 'Overvalued' Dollar

A confluence of factors promises to put pressure on the new Bank of Canada governor to direct monetary policy at fixing Canada’s so-called “overvalued” currency, according to a report released today by the C.D. Howe Institute. But in “The Seductive Myth of Canada’s “Overvalued” Dollar,” author Christopher Ragan provides two strong arguments against doing so: the importance of the Bank’s focus on inflation, and the weakness of the “overvalued” dollar argument.