Payroll Taxation in Canada:
An Overview
Livio Di Matteo
Michael Shannon*
Department of Economics
Lakehead University
D espite constituting the third most im-
portant source of revenue for Canadian
governments, payroll taxes receive relatively
little attention. This is particularly surprising
on two counts: first, there are important con-
troversies regarding the employment effects
of these taxes and, second, payroll taxes
have grown substantially over the last 30
years and are likely to continue to increase in
the future.
Payroll taxes rose from 2.9 per cent of total
government revenue in 1965 to 12.9 per cent
in 1993. As a share of total labour income,
they increased from 1.9 per cent in 1961 to
10.3 per cent in 1992. Payments for the three
major programs funded through payroll taxes
Unemployment Insurance, the Canada and
Quebec Pension Plans, and provincial work-
ers compensation rose from 3.6 per cent of
GDP in 1985 to 5.1 per cent in 1992.
The goals of this article are to provide a com-
prehensive overview of payroll taxation, to
consider its future direction, and to discuss its
potential impacts. We begin by outlining the
current state of payroll taxation in Canada,
chronicling its recent growth as a revenue
source. We also consider the range of mar-
ginal payroll tax rates across provinces and
use earnings distribution data to determine
the groups facing the highest payroll tax rates.
We then discuss anticipated future trends.
Following this, the impact of payroll taxation
on wages and employment is considered. We
conclude that these taxes do have a negative
impact on employment; however, there are a
wide range of estimates as to the size of this
effect.
Summer 1995 Canadian Business Economics
Payroll Taxes in
Canada
The federal and provincial governments im-
pose payroll taxes with levies on both employ-
ers and employees. The federal government
taxes employers and employees to finance un-
employment insurance and pensions. Prov-
inces tax employers to fund workers com-
pensation and, more recently, health care and
education; Quebec levies both employers and
employees for its own pension plan.
Over the last 30 years, the proportion of total
government revenue accounted for by payroll
taxes has quadrupled (Table 1). The average
payroll tax rate (as a percentage of total labour
income) rate jumped dramatically in 1966
with the onset of the Canada and Quebec Pen-
sion Plans (C/QPP) and has risen steadily
ever since (Figure 1).
Employer contribution rates for C/QPP and
Unemployment Insurance (UI) have risen
substantially in recent years (Table 2). The
rate applied to contributable earnings for
C/QPP was 1.8 per cent for both employees
and employers from 1966 to 1986. Since then,
they have risen 0.1 percentage points per year,
reaching 2.6 per cent in 1994. These rates are
levied on wage and salary earnings between
maximum pensionable earnings ($34,400 in
1994) and the basic exemption ($3,400 in
1994).
UI premiums are charged on earnings below
a weekly maximum ($815 in 1994) which is
linked to changes in the average industrial
wage over an eight-year period. The employer
rate is 1.4 times that for employees.1 Under
current arrangements, those working less
5
Figure 1 Payroll Taxes as a Percentage of butions to the UI fund from general reve-
Labour Income nues.2 Current premium levels are more than
Per cent three times higher than they were in 1966.
12
There have also been significant cyclical
10
movements in UI premium rates around the
upward trend. Premiums peaked following
8 the recession of the early 1980s, declining
once the debt accrued during the recession
6 had been paid off. Rates rose once again with
the recession of the early 1990s in order to meet
4
the growing cumulative deficit in the fund.
2 Workers compensation is financed by pro-
vincial levies on employer payrolls below a
0
26 29 32 35 38 41 44 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92
specified maximum earnings per employee.
The tax or assessment rate applied to this base
Source: Canadian Economic Observer, Kesselman (1994). varies across industry rate groups.3 These
Notes: Payroll Taxes are defined as total contributions to Workers
Compensation, CPP/QPP and UI and Provincial Payroll Taxes for
rates are generally set at levels sufficient to
Health & Education. Labour income is wages, salaries and cover the projected costs of accidents incurred
supplementary labour income. by the rate group in each year. Additional sur-
charges may be added to cover costs of past
than 15 hours per week who earn below 20 unfunded accidents. Average rates have risen
per cent of the weekly maximum are exempt. substantially in several provinces (Table 2).
As Table 2 indicates, UI premiums have fol- No province experienced a fall in its average
lowed an upward trend since 1966. This re- assessment rate between 1966 and 1994.
flects rising unemployment, increases in self- Quebec, Manitoba, Newfoundland, and On-
financing requirements due to the generosity tario also levy additional payroll taxes to help
of benefits and, since 1990, the end of contri- finance health care and/or postsecondary

Table 1 Trends in Payroll Taxes as a Percentage of Total Government Revenue1

Canada/
Unemployment Workers Quebec Provincial
Year Insurance Compensation Pension Payroll Taxes2 All
1950 2.3 1.2 - - 3.5
1955 2.2 1.0 - - 3.2
1960 2.5 1.1 - - 3.6
1965 1.9 1.0 - - 2.9
1970 1.5 0.8 3.3 0.1 5.7
1975 3.0 1.2 3.0 0.3 7.5
1980 2.7 1.3 3.0 0.5 7.5
1985 4.6 1.4 3.0 0.9 9.9
1990 4.6 1.7 3.5 1.9 11.7
1992 5.9 1.6 3.8 1.8 13.1
1993 5.8 1.3 3.9 1.8 12.9
Sources: Canadian Tax Foundation (1993); Kesselman (1994); data from Statistics Canada.
1 Includes all three levels of government.
2 Refers to provincial payroll taxes brought in by Quebec, Manitoba, Ontario, and Newfoundland to finance health and
education.

6 Canadian Business Economics Summer 1995

 education4. In Ontario, the Employer Health
Levy was introduced in 1990. It is applied at a
graduated rate to total annual gross wages,
salaries, and other remuneration paid by the
employer. In 1994, the rate was 0.98 per cent
up to a $200,000 annual payroll, and rose to a
maximum of 1.95 per cent for payrolls over
$400,000.
Manitoba introduced a payroll tax in 1982.
The initial tax rate was 0.75 per cent, which
rose to 2 per cent in 1987; however, the payroll
exemption was also increased from $50,000 to
$100,000. A payroll tax credit introduced in
1991 can reduce the rate by up to 0.3 per cent
for firms with qualifying training costs.
Quebecs payroll tax was introduced with its
Medicare plan in 1970 at an original rate of 0.8
per cent. Now Quebec also has a business sur-
tax on the payroll tax which stands at 15 per
cent of the payroll tax. In 1994, the effective
payroll tax rate was 3.75 per cent.
Newfoundland brought in its payroll tax in
1990 to fund health care and postsecondary
education. It was imposed at a rate of 1.5 per
cent on payrolls in excess of $300,000. In
1992, the commercial property tax for schools
was replaced by broadening the base for the
payroll tax. The exemption was lowered from
$300,000 to $100,000 of the annual payroll
and the rate was increased from 1.5 to 2 per
cent. The fishery, agricultural, and forestry in-
dustries which were originally exempted,
now are taxed at 1 per cent.

Table 2 Payroll Tax Rates, Workers Compensation Average Assessment Rates, Employer
UI and C/QPP Premiums, Provincial Payroll Taxes, 1966-941
Workers Compensation Average Assessment Rates Other Payroll Tax Rates
Provincial Taxes
CPP/
Nfld. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. UI2 QPP3 Que. Man. Ont.4 Nfld.
1966 1.62 n.a. 1.16 1.97 1.39 1.23 0.67 1.53 1.44 1.30 1.33 1.80 0 0 0 0

1971 1.62 n.a. 1.15 1.54 1.09 1.19 1.06 0.93 1.32 1.38 1.5 1.80 0.8 0 0 0

1976 1.42 n.a. 1.18 1.48 1.86 1.75 1.10 2.21 1.47 1.83 2.31 1.80 1.15 0 0 0

1981 1.49 2.44 1.26 1.38 2.10 1.66 0.89 1.31 1.60 2.52 2.52 1.80 2.63 0 0 0

1986 1.79 1.32 1.19 1.77 2.04 2.59 1.67 1.37 1.59 2.19 3.29 1.80 3.11 1.50 0 0

1991 2.92 1.95 1.66 2.04 2.32 3.20 2.25 1.63 1.85 1.82 3.54 2.30 3.55 2.25 .98/ 1.50
1.95
1992 3.00 2.00 1.98 2.13 2.50 3.16 2.16 1.65 1.98 2.02 4.20 2.40 3.75 2.25 .98/ 1.75
1.95
1993 3.23 2.22 2.28 2.19 2.75 2.95 2.16 1.60 2.04 2.16 4.20 2.50 3.75 2.25 .98/ 2.00
1.95
1994 3.18 2.07 2.54 2.15 2.75 3.01 2.12 1.67 2.13 2.42 4.30 2.60 3.75 2.25 .98/ 2.00
1.95
Sources: Association of Workers Compensation Boards of Canada; Kesselman (1994); Statistics Canada, Unemployment Insurance Statistics,
Health and Welfare Canada (1986).
1. In years where rates changed an average is reported.
2. Since 1971 this is 1.4 times the rate paid by employees. Pre-1971, employers and employees paid matching contributions which varied
with earnings.
3. Employees pay a matching rate. The 1994 Workers Compensation Assesment Rates are preliminary.
4. Rate varies by payroll size.

Summer 1995 Canadian Business Economics 7

Table 3 Payroll Tax Rates by Province: Employer Contributions Only
Nfld. P.E.I. N. S. N.B. Que. Ont.1 Man. Sask. Alta. B.C.

1966 4.75 n.a 4.29 5.10 4.52 4.36 3.80 4.66 4.57 4.43
1971 4.92 n.a. 4.45 4.84 5.19 4.49 4.36 4.23 4.62 4.68
1976 5.53 n.a 5.29 5.59 7.12 5.86 5.21 6.32 5.58 5.94
1981 5.81 6.76 5.58 5.70 9.05 5.98 5.21 5.63 5.92 6.84
1986 6.88 6.41 6.28 6.86 10.24 7.68 8.26 6.46 6.68 7.28
1991 8.76 7.79 7.50 7.88 11.70 10.99 10.34 7.47 7.69 7.66
1992 9.60 8.60 8.58 8.73 12.85 11.71 11.01 8.25 8.58 8.62
1993 9.93 8.92 8.98 8.89 13.20 11.60 11.11 8.30 8.74 8.86
1994 10.08 8.97 9.44 9.05 13.40 11.86 11.27 8.57 9.03 9.32

1. Ontario uses 1.95 as the rate of the Provincial payroll tax for 1987-1993.

Table 4 Marginal Payroll Tax Rates, 1991

Nfld. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C.

Employer Rates Only

Under CPP 10.26 7.79 7.50 7.88 11.70 10.99 10.33 7.47 7.69 7.66
maximum*
Under UI 8.16 5.69 5.40 5.78 9.60 8.89 8.24 5.37 5.59 5.56
maximum
(over CPP)
Under WC 9.45 1.95 1.66 2.04 5.87 5.15 4.5 1.63 1.85 1.82
maximum
(over UI, CPP)
Above all 1.5 0 0 0 3.55 1.95 2.25 0 0 0
ceilings
Combined Employer and Employee Rates
Under CPP 15.08 12.61 12.32 12.7 16.53 15.81 15.16 12.29 12.51 12.48
maximum1
Under UI 12.98 10.51 10.22 10.6 14.43 13.71 13.06 10.19 10.41 10.38
maximum
(over CPP)
Under WC 4.42 1.95 1.66 2.04 5.87 5.15 4.5 1.63 1.85 1.82
maximum
(over UI, CPP)
Above all 1.5 0 0 0 3.55 1.95 2.25 0 0 0
ceilings

1. Above CPP minimum insurable earnings and with sufficient hours and earnings to be covered by UI.

8 Canadian Business Economics Summer 1995

 The combined employer payroll tax rates the (annual) UI ceiling of $35,360 and conse-
from 1966 to 1994 are reported for each prov- quently had marginal rates equal to the sum
ince in Table 3. In most provinces, these rates of all tax rates excluding C/QPP. Workers
doubled or even tripled during the period. In compensation ceilings vary by province. In
1994, Quebec had the highest combined em- 1991, about 20 per cent of workers in most
ployer rate, at 13.4 per cent (compared to 3.13 provinces were paid more than the workers
per cent in 1966). The lowest rate was in Sas- compensation ceiling and consequently had
katchewan (8.57 per cent in 1994 compared to the lowest possible marginal payroll tax rate.
4.66 per cent in 1966).5 This minimum rate equaled the provincial
payroll tax rate (or 0 per cent in provinces
with no provincial payroll tax). In summary,
Impacts of Payroll about 20 per cent of workers faced the mini-
Taxes on Different mum marginal rate and 64 per cent faced the
maximum.
Employee Groups Data from the 1989 Labour Market Activity
Since economic models typically focus on Survey (LMAS) provide a similar picture. Be-
decisions at the margin, marginal payroll tax tween 63 per cent and 66 per cent of workers
rates are most relevant in evaluating the im- had earnings below the 1989 C/QPP ceiling of
pacts of these taxes. Marginal payroll tax rates $27,700.7 Estimates from the LMAS indicate
differ from the tax rates reported in Tables 3 that 55-58 per cent faced the maximum mar-
(plus employee contributions) because UI, ginal rate. Another 4-6 per cent were between
C/QPP, and workers compensation apply UI and C/QPP ceilings and 82-84 per cent were
only to earnings below a specified maximum below the workers compensation cutoff.
and because of our use of an average assess-
ment rate for workers compensation.6
The ceilings for UI, C/QPP, and workers Table 5 Percentage of
compensation, above which no tax is Employees Above
charged, mean that the marginal (and aver- Earnings Ceilings, 1991
age) tax rates will eventually fall as a workers
earnings rise. In 1991, for example, the maxi- Per Cent
mum marginal combined employer tax rate Earnings Above
for an Ontario worker was 10.99 per cent for Ceiling Maximum
those paid less than $30,500 who were UI in- CPP $30,500 35.9
surable. This fell to 8.89 per cent for those
earning between $30,500 and $35,360 (i.e., UI1 $35,360 28.0
those whose additional wage income was tax- Workers Compensation
able under all payroll taxes except C/QPP),
then to 5.15 per cent for those earning be- Nfld. $45,500 9.0
tween $35,360 and $42,000 (above the UI PEI. $25,000 29.1
maximum insurable earnings), and finally to
1.95 per cent for those earning more than N.S. $37,300 19.9
$42,000. Marginal rates by earnings level for N.B. $36,000 19.3
each province in 1991 are reported in Table 4.
Table 5 draws upon 1991 data on Canada Ont. $42,000 21.1
Pension Plan contributors to show the distri- Man. $38,000 17.5
bution of the workforce (excluding Quebec)
by marginal rate level. The annual payroll tax Sask. $39,000 17.5
ceiling for C/QPP was $30,500; in 1991, 64 per Alta. $40,000 21.2
cent of workers had earnings below this level
and consequently faced the maximum possi- BC. $45,800 16.5
ble marginal payroll tax rate (assuming they Source: Based on data from Health and Welfare
were all UI insurable). Another 7.9 per cent Canada (1991).
had earnings between the C/QPP ceiling and 1. Full-year equivalent

Summer 1995 Canadian Business Economics 9

 The LMAS dataset can be used to determine
the composition of the groups facing different
marginal tax levels and, consequently, it indi-
cates where the impacts of the taxes are likely
greatest. As Table 6 indicates, the proportion
of those facing the top marginal rate is rela-
tively high for women, young workers, the
less educated, and those in the Atlantic Prov-
inces. Those employed in non-union jobs,
with small employers, in the retail trade and
service industries (especially accommodation
and food), and in clerical, sales, or service oc-
cupations are all substantially more likely to
be at the top rate than the average worker. In
short, the low-wage sectors face the highest
marginal tax rates because of tax ceilings. It is
the workers in these sectors who bear the
brunt of these taxes8
Future Payroll Tax
Trends
In this section, we consider whether the up-
ward trend in payroll tax rates is likely to con-
tinue. Each tax is examined in turn.
Canada Pension Plan
The increases in the C/QPP rates which
have occurred since 1986 are part of a
planned long-term rate increase required to
maintain the viability of the plan. The rate
schedule projected sees combined employer-
employee rates rising gradually from 5.4 per
cent in 1995 to 12.80 per cent in 2021 (Cana-
dian Institute of Actuaries, 1993).
While this projection suggests substantial fu-
ture rate increases, it is not certain that this
rate schedule will actually be realized. At one
level, the projection is based upon assump-
tions regarding future growth in wages and
salaries, life expectancy, and other variables,
which are themselves uncertain. At a more
fundamental level, the projection assumes
that program benefit levels and eligibility will
remain the same. Less drastic rate increases
would be required if the program were to be
judged too costly, with the result that substan-
tial reductions in benefits and eligibility oc-
curred.
Workers Compensation
The likely course of future workers compen-
sation assessments varies substantially from
10 Canadian Business Economics
province to province, largely because of dif-
ferences in financial circumstances. Data col-
lected by the Financial Executives Institute of
Canada (1995) for 1993 show that Saskatche-
wan ran a surplus while its pension liabilities
were actually overfunded (Table 7). Three
other provinces had surpluses but had plans
with unfunded liabilities. Six provinces had
deficits in 1993; of these, Ontario, Quebec,
and Nova Scotia also had substantial un-
funded liabilities.
These financial positions suggest that as-
sessment rates in Ontario, Quebec, and Nova
Scotia may have to rise substantially in the fu-
ture. In fact, since 1984, Ontarios assessment
rates have included a surcharge intended to
amortize the unfunded liability by 2014. The
Workers Compensation Board of Ontario
(1992) suggested that its financial position
would require the average assessment rate to
rise to 3.98 per cent by 1996 and remain at
that level for the rest of the amortization pe-
riod. However, because of the slow economic
recovery in Ontario since the 1990-91 reces-
sion, the assessable payroll has not grown as
fast as projected and the post-1995 rate is now
likely to be higher than the 3.98 per cent tar-
get.9. Assuming a sustained one per cent rise
in average assessment rates seems reasonable
for Ontario. The problem is less severe in the
other two provinces with large unfunded li-
abilities and their required rate increases are
likely to be smaller than those in Ontario.10
The other two provinces with deficits, British
Columbia and Prince Edward Island, may
also require rate increases but, given their
relatively small unfunded liabilities, the re-
quired increases could be quite small or sim-
ply temporary. Some rate reductions may
eventually be possible in those provinces run-
ning surpluses; however, Alberta, New
Brunswick, and Newfoundland do have sub-
stantial unfunded liabilities and rates may not
come down for some time. Only Saskatche-
wan appears to be in a position to immedi-
ately reduce rates.11
Unemployment Insurance
Unemployment insurance premiums are
currently at a cyclical high and can be ex-
pected to fall as the debt accrued during the
last recession is paid off and a cumulative sur-
plus accumulates. The combined employer-
Summer 1995
Table 6 Percentage of Employees at the Maximum Payroll Tax Rate
by Selected Characteristic, 1989
All Employees 58.7
Men 47.4
Women 71.9
Age
16-24 72.2
25-34 61.3
35-44 48.7
45-54 52.6
55-64 54.2
Province
Newfoundland 67.2
Prince Edward Island 76.3
Nova Scotia 65.3
New Brunswick 67.2
Quebec 62.9
Ontario 55.6
Manitoba 63.9
Saskatchewan 62.6
Alberta 57.4
British Columbia 53.0
Education
Less than 8 years 69.0
Some secondary 63.5
High School 66.3
Some Post-secondary 63.9
Post-secondary Certificate 55.8
University Degree 38.0
Trades certificate 56.4
Employment Status
Full-time 57.9
Part-time 62.4

Summer 1995 Canadian Business Economics 11

 Union Status
Union 50.2
Non-union 63.3
Industry
Primary 52.3
Manufacturing 53.8
Construction 57.3
Transportation, Communications and 43.1
other Utilities
Trade 68.2
Finance 64.0
Services 63.3
Public administration 47.4
Occupation
Managerial/ Professional 45.3
Clerical 75.9
Sales 64.3
Service 70.5
Primary 61.7
Processing 56.3
Metals, Machining 49.4
Product Fabrication 66.1
Mechanics/Repair 41.7
Construction 52.3
Transport 52.7
Material Handling/ Craft 57.9
Firm Size (Number of employees)
Less than 20 70.2
20-99 64.6
100-499 58.5
500 or more 48.1

Source: Based on Labour Market Activity Survey data.

12 Canadian Business Economics Summer 1995

employee rate is currently projected to fall
from 7.2 per cent in 1995 to 6.72 per cent in
1996 and 5.28 per cent in 1997 (Freeman,
1995). This projected rate decline is slower
than that which would have occurred if the
1995 federal budget had not required the fund
to build a cumulative surplus of $5 billion
prior to the next downturn rather than merely
eliminate the cumulative debt.12 Rates are
also unlikely to return to pre-recession lows
due to changes in financing made in 1990
which eliminated general revenue contribu-
tions to the UI fund. Through the 1980s, the
share of UI benefits funded out of general
revenues was roughly 25 per cent (Employ-
ment and Immigration Canada, various
years).
Since all costs must now be covered by pre-
miums, this change in financing will lead to a
substantial, permanent upward shift in pre-
miums. However, this upward pressure will
be partly offset by cuts to benefits made in
1993 and 1994. The present combined rate of
7.37 per cent stands out markedly compared
to the pre-recession low of 4.35 per cent. Add-
ing 25 per cent to the latter figure (i.e., the for-
mer general revenue contribution) suggests
that rates could fall as low as 5.44 per cent,
which is near the currently projected 1997
rate. This may prove to be the new rate floor.
Table 7 Financial Positions of the Workers Compensation Boards,
1993
(millions of dollars)
Deficit/Surplus
Newfoundland 16
Prince Edward -1
Island
Nova Scotia -12
New Brunswick 17
Quebec -65
Ontario -504
Manitoba 19
Saskatchewan 4 62
Alberta 299
British Columbia -94
Source: Financial Executives of Canada Institute (1995)
Summer 1995 Canadian Business Economics
Naturally, if more cuts are made to UI bene-
fits, and these savings are used to reduce pre-
miums, then payroll taxes will fall further. Hu-
man Resources Development Canada (1994)
has provided estimates of savings under a va-
riety of reforms to UI. The elimination of Re-
gional Extended Benefits would provide the
single largest saving of the options costed
($4.5 billion). This would reduce combined
employer-employee premiums by 1.63 per-
centage points. This is likely an upper bound
as it assumes the largest possible cuts and that
the savings are realized to their full extent as
premium reductions. It should be noted that
there could be other competing uses for these
savings, including new labour adjustment or
income support programs.
Provincial Payroll Taxes
Substantial provincial debt (estimated at
$155 billion in 1994) will likely create pres-
sure for new payroll taxes or for further rises
in existing ones. Adding to these pressures are
the cuts to federal transfers brought about by
the replacement of the Established Program
Financing and the Canada Assistance Plan
with the Canada Social and Health Transfer,
as announced in the 1995 federal budget.
Payroll taxes may be an attractive source of
additional revenue from a political perspec-
Unfunded Liability Assessable Payroll
-119 2,921
-10 547
-461 4,640
-66 N.A.
-3,516 61,900
-11,532 83,423
-72 5,856
6,860
-277 23,010
-191 37,523
13
tive. Witness, for example, the relatively
muted response to the introduction of the Em-
ployer Health Tax in Ontario in 1990, com-
pared to the introduction of the Goods and
Services Tax a year later. The existing provin-
cial taxes are nominally earmarked for par-
ticular expenditures (health in Ontario and
Quebec, and health and education in Mani-
toba and Newfoundland). This makes it
tempting to argue that pressure for rises in
these taxes may be created by increases in
health spending, as the population continues
to age. However, it is probably more accurate
to view these taxes as just another source of
general revenue and, therefore, to think of fu-
ture trends as being tied to the provinces
overall fiscal situation.
Quebec will have a new one per cent payroll
tax in 1996 to raise funds for training. Levy-
grant schemes to fund training, which typi-
cally use a payroll tax as the levy, have also
been discussed as a possibility for Ontario in
the recent past although this may end with the
recent change in government.
Moreover, relative to most types of taxation,
a major attraction of payroll taxes is their rela-
tively low cost of administration and compli-
ance. Once the tax is in place and the collec-
tion mechanisms established, raising further
revenues from rate increases is a relatively
simple matter. Ontario, for example, reported
that for the fiscal year 1992-93, the adminis-
trative costs of its payroll taxes amounted to
0.38 percent of the associated tax revenues
which are substantially lower than for most
other taxes (Kesselman, 1994: 182).13
Another attraction of payroll taxation for pro-
vincial governments is the ability to shift
some of the tax burden onto the federal gov-
ernment. This effect operates through two
channels. First, federal employees and agen-
cies pay provincial payroll taxes in an effort to
be consistent with other employers even
though, technically speaking, the Crown is
immune from taxation. Second, for federal in-
come tax purposes, incorporated and unin-
corporated businesses are able to deduct pay-
roll taxes paid when calculating their income
for the purposes of remitting federal income
tax.14
14 Canadian Business Economics
Summary
In conclusion, it seems likely that the long-
term upward trend in payroll tax rates will
continue. This will be driven by rising C/QPP
contribution rates and reinforced by increases
in other payroll taxes, particularly increases in
workers compensation assessments in some
provinces. A possible source of relief is unem-
ployment insurance, with premiums declin-
ing as the expansion continues, as the debt in-
curred during the last recession is paid off,
and as UI benefits are cut and eligibility re-
quirements tightened. The combined effects
of falling unemployment and UI reform could
more than offset rises in other payroll taxes in
the near term. However, as the economy
moves through the business cycle, UI premi-
ums will stabilize and then rise, while C/QPP
premiums will continue to climb, with the re-
sult that the overall payroll tax rate will prob-
ably increase.
The Impact of Payroll
Taxation
Economist and Business
Views
In simple economic models, a payroll tax
levied on employers lowers labour demand,
inducing a decline in wages which will par-
tially or, if labour supply is perfectly inelastic,
wholly offset the effects of the tax on employ-
ment.15 Alternatively, a payroll tax levied on
employees will decrease labour supply, lead-
ing to an increase in wages which will again
counter the initial effects of the tax on em-
ployment. In either case, the employers wage
costs (tax inclusive) will rise while the net-of-
tax wage received by workers will fall. Em-
ployment will decline in either case (if neither
curve is perfectly inelastic) but no unemploy-
ment will be generated by the tax since work-
ers will remain on their labour supply curve
and choose to work less at the lower net-of-
tax wage. Thus, we have the result, familiar to
economists, that the effect of the tax is the
same regardless of whether it is levied on the
employer or the employee.
Economists have placed the greatest empha-
sis on whether business or labour bears the
burden of the tax. The answer depends upon
Summer 1995
how responsive the market wage rate is to the
introduction of the tax. If an employer payroll
tax eventually leads to a large offsetting fall in
wages, then workers will bear much of the
burden of the tax. The same result is obtained
if an employee payroll tax induces only a
small increase in the wage. In either case, the
labour supply and labour demand elasticities
are the critical parameters in determining the
extent to which wages change and the degree
to which employment will change in response
to the wage change.
In Canada, especially for the approximately
35 per cent of the workforce covered by col-
lective agreements, the simple model of sup-
ply and demand may not accurately reflect
how wages are determined. Non-cooperative
bargaining theory suggests that the effects of
payroll taxes in a collective bargaining context
will be in the same direction as in the simple
model (Wilton and Prescott, 1993). Employ-
ers will attempt to share the cost of an em-
ployer payroll tax with their unionized work-
ers by trying to negotiate smaller wage
increases. Unions will try to shift the em-
ployee portion of a payroll tax to employers by
negotiating higher wage increases.
There is a contrast between what might be
called the business view or public view of tion in the macroeconomics literature.18
the effects of payroll taxes and the econo-
mists view. Business groups view payroll
taxes as a tax on jobs and emphasize their
employment effects. Quoting the Canadian
Chamber of Commerce: Rising payroll taxes
leave companies with little choice other than
to cut jobs or hire fewer people. (Globe and
Mail, February 10, 1994). This view also has a
following in government circles. Paul Martin
has referred to payroll taxes as a cancer on
jobs (Freeman, 1995). Statements concern-
ing the 1994 roll-back of UI premiums (Fi-
nance Canada, 1994) and arguments made
for UI reform by Human Resources Develop-
ment Canada (1994: 42-43) also emphasize
employment effects.
Can these two views be reconciled? Stressing
employment impacts makes most sense to
economists if labour demand and supply
curves are elastic or if wage rates are rigid and
the tax is levied on employers. In the former
case, any wage change induced by the tax will
result in relatively large changes in employ-
ment. In the latter case, labour demand falls
Summer 1995 Canadian Business Economics
with an increase in the tax but, as there is no
offsetting decline in wages, employment falls
in the rigid-wage sector.
Furthermore, the fall in employment in the
rigid-wage case has the potential to increase
unemployment since those losing their jobs
will still want to work at the constant wage.
The potential proviso is necessary since the
disemployment effect may be specific to the
rigid-wage sector. The existence of sectors
with flexible wages in which those losing jobs
in rigid-wage sectors can work will mean that
some of these unemployed workers will enter
the flexible-wage sector, driving its wages
lower than the payroll tax would alone, until
the unemployed are absorbed. Unemploy-
ment may still occur, but it will be of the
wait variety, as workers queue for jobs in
the rigid-wage sector.16
If there is no other flexible-wage market to
which workers losing their jobs in the rigid-
wage market can move, as is the case in mini-
mum-wage labour markets, the effects of pay-
roll taxes will be solely on employment and
will definitely create unemployment.17 The
rigid-wage case has received little attention
from economists when examining payroll
taxes despite the common use of this assump-
It could also be argued that the business
view reflects a focus on the short-run effects
of payroll taxes. This can be a legitimate view
if the wage adjustments stressed by econo-
mists are slow, or if those employers that now
bear the costs of the tax may not be around to
benefit from any longer-term wage decline
which the tax may bring. Dahlby (1993) notes
that there is support in the empirical literature
for slow dynamic adjustment; some evidence
on this point is presented in the next section.
It is also possible that business is not con-
cerned with employment effects per se, but
that emphasizing them is the best way to gar-
ner support against a policy which creates a
welfare loss for employers via reduced pro-
ducers surplus and added costs of adminis-
tering the tax.
Another surprising result from the business
point of view is the economists prediction
that it is irrelevant to the taxs eventual impact
whether it is levied on employers or employ-
ees. It is hard to imagine, for example, that
15
employer groups would be indifferent to a
payroll tax levied on their wage costs or to a
surtax on wage income levied through the in-
come tax system. Yet the simple model sug-
gests that the effects would be much the
same. Again, wage inflexibility may help to
reconcile the two positions. In the presence of
rigid wages above market-clearing levels, a
tax on labour income will have no effect on
employer wage costs or on employment; i.e.
there will be no costs to employers.
Offsetting Benefits
Some payroll taxes provide a benefit to the
employer which may, to some degree, offset
the cost of the tax itself. Workers compensa-
tion premiums are paid by employers to fi-
nance payments to injured workers. This sys-
tem provides two possible benefits to
employers: first, workers give up the right to
sue their employers in the event of a work-
place injury and, second, since workers know
they will be compensated in the event of an
injury, this reduces any compensating wage
differential needed in more dangerous jobs.19
It is clearly inappropriate, then, to treat the en-
tire workers compensation premium as a cost
to employers. Indeed, Vaillancourt and Mar-
ceau (1990) find that the effects of workers
compensation assessments are in the oppo-
site direction to the effects of other payroll
taxes. They suggest that offsetting benefits
may help explain this.
The offsetting benefit argument can also be
applied to unemployment insurance and
C/QPP premiums. The greater security pro-
vided by UI and the post-retirement pension
benefits through C/QPP may make workers
willing to accept lower wages, thus offsetting
the employer portion of the tax. Only the pro-
vincial payroll taxes have no apparent offset-
ting benefit.
The lack of UI experience rating and the im-
perfect experience rating systems in workers
compensation programs weaken the benefit-
tax link for individual employers. The pay-as-
you-go nature of C/QPP has the same effect.
Unemployment insurance may allow employ-
ers with unstable labour demand patterns to
pay a lower wage than would be necessary
without UI. Consequently, the net effect of UI
on employment could actually be positive
among such employers. Of course, firms with
16 Canadian Business Economics
stable work patterns receive no such offset-
ting benefit and, given the lack of experience
rating, end up subsidizing other employers.
These arguments suggest that payroll taxes
with offsetting benefits should be analysed
differently from other payroll taxes. However,
the differences between the two types of taxes
may not be as stark as it first seems. In prac-
tice, the effect of a change in tax rates may be
similar between the two types of taxes even
though the consequences of introducing the
two different types of tax from scratch may be
very different. This is because the link be-
tween a change in the tax rate and changes in
offsetting benefits of the program funded may
be weak. For example, current increases in the
workers compensation assessments to pay
for unfunded benefits awarded in the past
provide no offsetting benefit to current em-
ployees. Similarly, increases in C/QPP premi-
ums for todays young workers to pay pension
liabilities of tomorrows retiring baby boom-
ers provides little offsetting benefit for the for-
mer. Reforms which strengthen links between
tax rate changes and benefit changes will re-
duce the distortionary effects of these taxes.
The introduction of a payroll tax may pro-
vide another type of offsetting benefit to em-
ployers if it, or the program financed by the
tax, replaces an existing employer tax or dis-
places a fringe benefit commonly provided by
employers. The Ontario Employer Health Tax,
for example, replaced Ontario Health Insur-
ance Plan premiums which were commonly
paid by employers (as a fringe benefit).20
Ceilings and Floors
An important feature of UI, C/QPP, and
workers compensation taxes is the existence
of a ceiling above which earnings are not
taxed. Such ceilings lead to the differences in
marginal tax rates recorded in Table 4. At the
extreme, the marginal employer tax rate on an
extra hour worked by a worker with earnings
above the ceilings of all payroll taxes is zero
compared to at least 8.57 per cent and as high
as 13.4 per cent for a low-wage worker in
1994. These ceilings will make higher-wage
labour relatively cheaper at the margin, with
the consequence that wage and employment
effects will be more severe for lower-wage
workers. This can create a bias in favour of
hiring highly-paid workers. It also provides an
Summer 1995
incentive to have current workers work more
hours rather than hire additional workers and
so favors full-time over part-time employ-
ment. The effects of ceilings also make these
taxes more regressive.
These impacts will be less important for a tax
with offsetting benefits. With UI, for example,
earnings above the insurable ceiling are not
taxed but, also, are uninsured. Consequently,
wages for higher-paid workers may be greater
than if insurance applied to all earnings.
The existence of minimum pensionable and
insurable earnings under C/QPP and UI, and
the 15 hour per week requirement for UI, cre-
ate biases in the opposite direction to ceilings.
However, figures reported in an earlier section
suggest that ceilings are empirically more im-
portant than floors.
Exempt or Low-Tax Groups
If certain groups are exempt from the payroll
tax for example, the self-employed or some
small businesses under provincial payroll
taxes then such taxes will tend to depress
wages (incomes) in the exempt group as well
as the covered groups. In effect, the fall in la-
bour demand in the covered group represents
a fall in labour demand for all workers of that
particular skill level regardless of group and
will therefore lower wages across groups.
Empirical Work on
the Effects of Payroll
Taxation
Dahlby (1993: 133), in reviewing the litera-
ture on the incidence of payroll taxes, notes
that empirical studies....suggest that labour
bears over 80 per cent of the employer payroll
tax burden in the long run.21 The usual find-
ing is that, consistent with the simple model,
wage rates adjust to offset payroll taxes result-
ing in a significant shifting of the tax to la-
bour.22 This result suggests that it is incorrect
to ignore the wage effects of payroll taxes, as
the business view tends to do.
A number of Canadian studies have exam-
ined the shifting issue. Using collective
agreements data in Quebec, Vaillancourt and
Marceau (1990) found the standard result that
increases in general payroll taxes reduced
wage growth with some of the tax, shifted to
Summer 1995 Canadian Business Economics
workers. Increases in workers compensation
assessments, however, actually appeared to
increase wage growth. The authors use an off-
setting-benefit argument to explain this latter
result, noting the close tie between tax rates
and injury costs for workers compensation.
Beach, Lin, and Picot (1995) estimate a labour
demand equation derived from a CES produc-
tion function on pooled provincial employ-
ment and wage data for 1966-1993. Their re-
sults are consistent with full shifting of the
employer payroll tax to workers through wage
reductions. Wilton and Prescott (1993) exam-
ine the impact of income, sales, and payroll
taxes on wage costs using data on private-sec-
tor collective agreements from 1979-1992. Us-
ing several alternative specifications, they
find that higher employer payroll taxes actu-
ally increase real wages. This is contrary to
the standard result from the simple supply-
demand model or the bargaining framework,
which lies behind Wilton and Prescotts
specification.
The macroeconomic-labour literature,
which aims to explain unemployment pat-
terns by estimating aggregate labour market
models, can also be used to assess the effects
of payroll taxes.23 In these models, employ-
ment is negatively related to real wage costs
and real wages depend negatively on the un-
employment rate and positively on the
wedge, which is the difference between the
wage cost to the employer (including tax) and
the net wage of the worker. The payroll tax en-
ters the model as part of the wedge. As in the
simple model, a rise in payroll taxes increases
the wedge, and therefore tax-inclusive wage
costs, and this lowers employment. However,
unlike the simple model, there is no assump-
tion that employment is determined along the
labour supply curve. Consequently, rising
payroll taxes raise wage costs and lower em-
ployment, but can also lead to unemploy-
ment. These unemployment effects of payroll
taxes create downward pressure on wage
rates which partially offsets the original effect
of payroll taxes on wage costs.
Our calculations based on Bean, Layard, and
Nickell (1986) indicate that a one per cent rise
in payroll tax rates results in long-run in-
creases of 0.5 per cent in real wage costs and
a -0.2 per cent decrease in employment. Bean,
Layard and Nickells own simulations suggest
17
that increases in the wedge raised the unem-
ployment rate by 1.34 points between the
early-1960s and the early 1980s a period in
which the unemployment rate rose by about
4.5 percentage points. Of the 1.34 point rise
attributed to the wedge, our calculations sug-
gest that about 25 per cent can be attributed to
the rise in payroll taxes alone. Simulations by
Keil and Symons (1990) indicate that 0.5
points of the 3 percentage point rise in unem-
ployment between 1981 and 1985 was due to
increases in the wedge. Again, based on our
calculations, about 22 per cent of this 0.5
point increase can be attributed to the rise in
payroll taxes.
Both Bean, Layard, and Nickell and Keil and
Symons adopt dynamic specifications. Re-
sults from the former show a mean lag for em-
ployment adjustment of 1.5 years. In the Keil
and Symons model where dynamics are
slower, while a change in the payroll tax does
not affect long-run employment, it can have
lingering negative effects as the economy
moves toward equilibrium. This pace of la-
bour market adjustment lends some credence
to the business view of the payroll-tax effect.
Both models, though, are consistent with the
economists story in the long run.
In general, then, studies support the stand-
ard model suggesting that the effects of pay-
roll taxes on employer wage costs are moder-
ated by changes in wage rates. Only the study
by Wilton and Prescott is at odds with this
conclusion. This suggests that an important
effect of the rise in payroll taxes, then, has
likely been slower wage growth. In addition,
the macroeconomic-labour studies suggest
that payroll taxes will reduce employment
and raise unemployment though these effects
may be transitional. Another interesting point
arising from this literature and the study by
Wilton and Prescott is that the impact of a
payroll tax on labour markets can be expected
to be much the same as other taxes (i.e. sales
and income taxes) which drive a wedge be-
tween the supply and demand prices for labour.
Finally, the literature has also considered the
distributional impact of Canadian payroll
taxes. Recent work by Gillespie, Vermaeten,
and Vermaeten (1995) has found that payroll
taxes were generally regressive with respect
to family income from 1951-1969 but by 1988,
they had acquired an inverted U-shape. Pay-
18 Canadian Business Economics
roll taxes were progressive until about the 5th
decile, remained proportional for the next
two, and then began to decline. Most likely,
the increased progressivity of the taxes at the
low to middle income ranges does not reflect
changes in tax design but rather the growth in
the importance of transfers as an income
source in the lowest deciles.
New Estimates of the
Impact of Payroll
Taxation
Measuring the impact of payroll taxes on em-
ployment and wages requires estimates of la-
bour demand and supply elasticities. How-
ever, there are no generally accepted
estimates of these elasticities for the Canadian
economy. Past studies report large differ-
ences.24
Table 8 presents estimates of the wage and
employment effects of a one per cent rise in
marginal payroll tax rates based upon various
combinations of labour supply and labour de-
mand elasticities. The elasticities used are
reasonable by standards of the literature, with
the exception of the -2.5 labour demand elas-
ticity (cases IV and VII) used by Keil and Sy-
mons (1990), which is provided for contrast.
As the labour demand and supply elasticities
increase, the effects of payroll taxes on em-
ployment increase; however, the results show
that for reasonable labour demand elastici-
ties, these effects are not substantial.
The table also illustrates the sensitivity of the
wage-shifting results to even the small range
of elasticities considered. A labour demand
elasticity of -0.3 and labour supply elasticity
of 0.15 implies that 33 per cent of the tax rise
is realized as a rise in labour costs and the rest
as a fall in employee pay. Elasticities of -0.15
and 0.5 more than reverse this result with the
employer cost share at 77 per cent and the em-
ployee burden at 23 per cent. Therefore, the
wage effects of the taxes may be particularly
hard to predict.25
The top panel of Table 9 presents the long-
run effects of a one per cent rise in average
(rather then marginal) payroll taxes, as de-
rived from the Bean, Layard, and Nickell
model. These are closest to those obtained for
Summer 1995
case VI in the previous table (for a labour de-
mand elasticity of -0.3 and a labour supply
elasticity of 0.5). The actual long-run labour
demand elasticity in Bean, Layard, and
Nickell is -0.42.
The bottom panel of Table 9 reports long-run
impacts based upon our own estimates using
annual data for the period 1958-1992. We
base our model on Bean, Layard, and
Nickells aggregate labour market model so as
to facilitate comparison as well as make use of
a standard and accepted modelling approach.
This involves specification of a real wage
equation and an employment equation (both
in log-linear form). In the model, the real
wage is explained by the wedge (including
payroll taxes), an indicator of labour market
tightness (the employment rate), the capital-
labour ratio, and the unemployment insur-
ance coverage rate. Employment depends
upon the real wage, GDP, and the capital-la-
bour ratio. Both equations include quadratic
trend terms and allow for dynamic adjust-
ment by including a one-period lag of the de-
pendent variable as a regressor. Modifications
were made to reflect the current articles inter-
est in payroll taxes.26 Both level and first-dif-
ference versions of the model were estimated
using two-stage least squares.27
The results broadly parallel those of Bean,
Layard, and Nickell. The coefficient on the
wedge was positive and reveals that there is a
positive relationship between the average
payroll tax rate and real wages; however, this
coefficient is only marginally significant in the
levels version and insignificant in the first dif-
ferences version. Moreover, there is a negative
and significant relationship between the real
wage variable and changes in employment
suggesting that increases in the average pay-
roll tax rate can lead to a reduction in employ-
ment via changes in the real wage. The long-
run labour demand elasticity was -0.56.28
These results suggest that the employment
effects of payroll taxes are non-trivial. Solving
the estimated equations for the long-run ef-
fect of a one per cent rise in the average pay-
roll tax rate on employment indicates a rise in
real wage costs of 0.56 per cent and a decrease
in employment of 0.32 per cent in the long run
(Table 9). The wage received by workers
would fall by 0.44 per cent. Using 1994 as the
base year, in the long run about 40,600 jobs
would have been lost by such a policy action.
We emphasize that there are a wide range of
estimates of the actual magnitude of the job
losses from payroll taxation because, ulti-
mately, the size of the losses depends on esti-
mates of labour demand and supply. At the
same time, the overall evidence is consistent
with the view that payroll taxes reduce em-
ployment. The fact that since the 1960s the
persistent upward trend in unemployment
has been accompanied by rising payroll tax

Table 8 Estimated Effects of a 1 Per Cent Rise in Marginal Payroll

Tax Rate
Various Labour Supply and Demand Scenarios

I II III IV V VI VII
Elasticity Assumptions
Labour Supply 0 0.15 0.15 0.15 0.50 0.50 0.50
Labour Demand all -0.15 -0.3 -2.5 -0.15 -0.3 -2.5
Effects of a 1 Per Cent Rise in Marginal Payroll Tax Rate
Employer Wage 0 0.50 0.33 0.06 0.77 0.63 0.17
Costs/share
Worker Wage/share -1 -0.50 -0.67 -0.94 -0.23 -0.37 -0.83
Employment 0 -0.08 -0.10 -0.14 -0.12 -0.19 -0.42
Jobs1 (000s) 0 9.5 12.7 18.2 14.6 23.9 53.0

1. Assumes employment before tax increase of 12,700,000.

Summer 1995 Canadian Business Economics 19

rates is probably not an entirely coincidental
relationship.
Conclusion
Payroll taxes have grown to become the third
most important source of government reve-
nue after personal income taxes and con-
sumption taxes. Given the unfunded liability
problems in C/QPP and the workers com-
pensation schemes in some provinces as well
as fiscal problems at both the provincial and
federal level, governments may attempt to
further exploit this tax base. In addition, the
relatively hidden nature of employer payroll
taxes provides a further incentive for their use
given the current climate of resistance to vis-
ible tax increases.
Payroll tax rates vary across provinces and
industry groups because of the number of dif-
ferent taxes as well as differences in rates. We
found that when the composition of the
groups facing tax levels is examined, low-in-
come groups faced higher marginal rates.
Women, young workers, those with less edu-
cation, employees in retail, clerical, and serv-
ices, and in small business generally, are
likely to be at high marginal rates and conse-
quently bear many of the employment and
wage costs these taxes may produce.
The empirical literature suggests that payroll
taxes raise employer wage costs and have im-
portant negative consequences for take-home
wages. There is also some evidence of nega-
Table 9 Estimated Effects of a One Per Cent Increase in Average
Payroll Tax Rate
Bean, Layard, and Nickell1
Wage Costs
Employment
Job Loss2 (000s)
Di Matteo and Shannon3
Wage Costs
Employment
Job Loss2 (000s)
1. Based upon estimates reported in Bean, Layard and Nickell (1986)
2. Assumes employment before tax increase of 12,700,000.
3. Details of estimates available from the authors.
20 Canadian Business Economics
tive employment effects. In estimating the ef-
fects of payroll taxes, we emphasize that the
size of these impacts depends on the labour
demand and supply elasticities utilized. How-
ever, there is no consensus estimate of these
elasticities. Our own estimates imply that a
one per cent rise in the average tax rate will
lead to a 0.56 per cent rise in wage costs and a
-0.32 per cent fall in employment.
Notes
* The authors wish to acknowledge the helpful com-
ments of Jon Kesselman and two anonymous referees.
1. Prior to 1971, premiums differed by earnings class.
The 1966 figure reported in Table 2 is an average.
2. The 1994 system is more generous than the 1966
system in terms of level and duration of benefits.
Generosity, however, peaked in the 1970s.
3. In some provinces, partial experience rating allows
rates to vary among firms within an industry rate
group as well.
4. These taxes are examined in detail in Kesselman
(1994).
5. The summed rates in Table 3 apply to wage and
salary earnings below the maximums specified for
workers compensation, C/QPP, and UI. Rates ap-
plicable to other types of labour income, such as
fringe benefits, differ as UI and C/QPP exclude these
while the provincial taxes do not. In each province,
employee contributions represented 5.67 per cent of
total labour income in 1994.
6. The use of average workers compensation assess-
ments is unavoidable if figures are to be reported in
summary form. Quebec, for example, had 341 indus-
try rate groups in 1993. Note, however, that the use
of an average rate masks substantial variation in
0.5
-0.2
25.4
0.56
-0.32
40.6
Summer 1995
 rates between industry groups. For example, work-
ers compensation assessment rates ranged from
0.15 per cent to 23.6 per cent across Ontario rate
groups in 1992.
7. The range arises from the use of alternative meas-
ures of earnings.
8. Again, the picture, especially by industry, is impre-
cise because of the use of average assessment rates
for workers compensation.
9. The possibility of extending the amortization period
to 2024 or abandoning full funding for 70 per cent
funding were also examined. These options would
still require rate increases, but on a smaller scale
than those necessary under the current plan.
10. The unfunded liability was 9.8 per cent of assessable
payrolls in Nova Scotia, 5.7 per cent in Quebec, and
13.3 per cent in Ontario in 1993.
11. This discussion refers to rate adjustments required
to clear past liabilities. Considerable uncertainty
with respect to these future rate projections is intro-
duced by changes in future accident rates and bene-
fits. The recent introduction of a wage-loss system
in Ontario, for example, makes future benefits for
permanent disability pensions less predictable.
12. The changes in the budget will tend to dampen cy-
clical rate swings requiring rates to be higher during
upswings and lower during recessions than was the
case in the past.
13. On the other hand, Vaillancourt (1986: 83) argues
that the total administrative and compliance costs
of the personal income tax and payroll tax system
in Canada account for about 6.9 per cent of tax reve-
nues collected.
14. The federal government has moved to curtail the
deductibility of these provincial payroll taxes.
15. Dahlby (1992) provides a thorough review of the
theoretical literature on payroll tax impacts.
16. See Mincer (1976) for a model with this type of
unemployment.
17. This argument, combined with the observation that
marginal payroll tax rates are highest for low-wage
workers, suggests that employment impacts may be
especially large for these workers.
18. Mitchell (1993) provides a recent survey of the wage
rigidity literature.
19. See Meng (1989) for measures of compensating dif-
ferentials for dangerous jobs in Canada.
20. Dahlby (1993: 81) notes that 65 per cent of premi-
ums were paid by employers.
21. Hamermesh (1993: 172), however, is skeptical of
these not very satisfactory studies.
22. The supply-demand model suggests that an em-
ployer payroll tax should decrease net-of-tax wages
(or slow wage growth) while a tax on employees
should increase wage growth.
23. Layard, Nickell, and Jackman (1991) and Lindbeck
(1993) provide recent examples.
Summer 1995 Canadian Business Economics
24. For example, Woodland (1975) reports labour de-
mand elasticities by industry that range from -0.351
(finance) to -0.009 (trade) while Merrilees (1982)
reports small labour demand elasticities that are ac-
tually positive for certain age groups. The long-run
labour demand elasticity for Canada in the Keil and
Symons (1990) model is -2.5 compared to -0.42 in
Bean, Layard, and Nickell (1986). Beach, Lin, and
Picot (1995) provide an estimate of roughly -.3. Hum
and Simpson (1991) summarize the Canadian la-
bour supply literature reporting that uncompen-
sated labour supply elasticities are almost always
below 0.5 with a concentration of studies around
0.4-0.5 and another group concentrated in the 0.1-
0.2 range. Some studies have even reported negative
labour supply elasticities.
25. Hamermesh (1993) concludes that near full-shifting
to labour is a reasonable assumption on the basis of
low labour-supply elasticity estimates (mainly for
the United States).
26. Specifically, two changes were made: (1) the
wedge was separated into payroll tax and non-
payroll tax components and (2) rather than model
the change in the real employer wage as a function
of the level of the wedge, we considered it more
natural to express the level of the real wage as func-
tion of the level of the wedge. Additional detail re-
ga rding the specification, data sources, and
estimation are available from the authors.
27. This is in recognition of the simultaneity of the two
equations. Employment depends upon the real wage
and the real wage depends upon employment
through the employment rate.
28. These results from Table 9 are from the levels version
of the model because it is not possible to simulate
long-run effects from the first- differences version of
the model.
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