Equalization, Efficiency and Migration: Watson Revisited

Abstract

Since the publication of Watson (1986) it has been accepted that the efficiency gains from the Canadian equalization system are small compared to the costs. In this paper, we reassess this result, making the point that gains from the reallocation of labour arise from the total migration of workers, not just from a one-year flow of migrants as used in the earlier calculations. This revision makes a large difference. The benefit-cost ratio of the equalization changes assessed (those between 1971 and 1976) rises from less than 0.02 in the Watson analysis, to 1.61, suggesting that equalization might improve efficiency after all.