central bankers ’ speeches bank of canada research suggests that the main reason behind these improvements has been the increased sensitivity of provincial population growth to labour market opportunities – canadians are going where the jobs are. 6 finally, wages are flexible in canada. results from the bank of canada ’ s wage setting survey indicate that, while firms are typically reluctant to reduce base wages, incentive pay offers a possible source of downward flexibility in total compensation. 7 about 90 per cent of canadian private sector firms currently use short - term incentive pay plans. 8 such risk sharing is an effective way to maintain employment and profitability during uncertain and volatile times. a resilient financial system an important lesson from europe ’ s experience is the critical role that a sound financial system plays in the monetary policy transmission mechanism. it helps to ensure that changes in central bank policy are transmitted effectively to all regions to support growth and employment. when a sizeable share of a country ’ s banking sector has ( or is perceived to have ) deficient capital and liquidity positions, credit doesn ’ t flow to where it is needed. recent experience in europe has shown the particular problems a monetary union faces when banks become less willing to lend across borders within the union. this fragmentation has reinforced the links between sovereign and bank solvency. as european leaders now recognise, without major reforms to create a banking union, emu is fundamentally weakened. in canada, the existence of largely centralized prudential regulation and deposit insurance pools risk across the country. when combined with a large number of national banking institutions, this greatly reduces the risk that localized economic and financial disruptions impair provincial solvency. since the strength of the canadian banking system has been well documented, i will concentrate on canada ’ s sound regulatory framework. its key elements are : first, supervision is focused and proactive. consolidated prudential supervision is not burdened by other objectives such as the promotion of home ownership or community reinvestment. the staged intervention approach of the office of the superintendent of financial institutions ( osfi ) means it works with institutions to correct problems at an early stage, while they are still manageable. second, efforts to promote financial stability are coordinated. federal authorities consistently share information, coordinate actions, and pool advice to the federal government on financial sector policy. most notable in this regard has been a series of actions to slow the rate of increase in household debt. the bank of canada also works with provincial authorities to implement a number of global initiatives. third, canada has clear and

domestic activity collapsed. there are few institutional mechanisms within the economic and monetary union ( emu ) at present to offset the shock. in alberta ’ s case, a rising tide has lifted all boats. that is because the canadian monetary union has what europe does not : a single financial market ; a flexible, national labour market ; and significant fiscal transfers. these smooth the adjustments brought about by the large shifts in relative prices. fiscal federalism helps to share risks despite the equilibrating movement of real provincial exchange rates, shocks to our economy can still have a more significant impact on some regions than others. since monetary policy works at an aggregate level to support aggregate demand, it cannot easily deal with such distributional consequences. m. carney, “ dutch disease, ” a speech delivered at the spruce meadows round table, calgary, alberta, 7 september 2012. internal trade has been supported by the removal of interprovincial barriers following the implementation of canada ’ s agreement on internal trade in 1995. bis central bankers ’ speeches fiscal transfers are thus an important element of a successful monetary union. they are sizeable in canada, representing 8 per cent of gdp across all levels of government ( charts 6 and 7 ). canada ’ s equalization program helps stabilize the impact of asymmetric shocks. for example, between 2006 and 2011, federal support programs, including equalization payments and canadian social and health transfers, grew more rapidly for provinces whose economies were hardest hit by the crisis ( chart 8 ). 3 the employment insurance program also shares risk. through transfers to 2 per cent of the working - age population, the program particularly benefits provinces with higher unemployment rates ( chart 9 ). in the medium term, one of the building blocks of european fiscal federalism could be a paneuropean employment insurance scheme built on a common european labour market. this would reduce impediments for those looking across the continent for work, while providing a cross - country automatic stabilizer. labour market flexibility for canada and canadians to work, workers must be able to move to different jobs, and wages must adjust to help maintain full employment. by international standards, the canadian labour market is highly flexible, although there is still room for improvement. 4 our labour mobility as a whole is similar to that in the united states. by some estimates, the canadian labour market is almost four times as flexible as the european labour market. 5 an obvious example of this flexibility is the way that canadians have responded to the higher wages and