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I've written about differences in the Canadian and U.S. labor markets before; see here.  I see that Steve Williamson has recently chimed in as well with this: Why are Canadians Working so Much More than Americans?


Now consider creating a new country consisting of U.S. border states: Washington, Montana, North Dakota, Minnesota, Wisconsin, Michigan, Ohio, New York, Vermont, New Hampshire and Maine (I exclude Alaska, Idaho, and Pennsylvania). If we were to combine these border states with Canada, the region of interest would look roughly like this (map is a little off, but you get the idea):



The question is this: Would you expect the labor market in the U.S. border states to look more like the Canadian labor market or more like the U.S. labor market?

There is good reason to believe, I think, that the demographics across the two countries are pretty similar (though certainly not identical). If the type of economic activity along the border is roughly similar across the two countries, then one might reasonably expect similar labor market behavior in Canada and the border states. But this is not what we see at all.

Here is a plot of the participation rate (employment plus unemployment as a ratio of the working age population):

The U.S. border states look a lot more like the rest of the U.S. and not like Canada at all. Here is a plot of the employment rate (employment as a ratio of the working age population):

Once again, the border states look more like the U.S. in general, rather than Canada.

A preliminary conclusion is as follows: [1] If Canada-U.S. demographics are roughly similar; and [2] if U.S. border states are roughly similar to their Canadian counterparts in terms of sectoral composition; then the differences we observe between the two countries (in terms of labor market activity) are quite possibly driven by policy differences.

Exactly what sort of policy differences we are talking about here remains an open question.