GLOBAL ECONOMICS
Patrick Grady
Lowering EI Eligibility Requirements to 360 Hours Would Boost Structural Unemployment
June 18, 2009
Liberal Leader Michael Ignatieff has proposed that the period required to qualify for Employment Insurance be temporarily reduced for the duration of the national economic crisis to a uniform 360 hours across the country ( “Make EI Work,” Financial Post, May 23, 2009). This would replace the current Variable Entrance Requirement that ranges from 420 hours to 700 hours depending on the unemployment rate in each of 58 sub-provincial economic regions, which, by the way, almost everyone including Prime Minister Harper agrees is an undesirable “patchwork.” For instance, if the unemployment rate in the economic region is above 13 per cent, only 420 hours are required to qualify, but if it is under 6 per cent, 700 hours are required (see table for VERs for all regions).
While Mr. Ignatieff has not released a detailed policy paper explaining exactly how his proposal would work, he said that it would not affect new workers or those returning to the workforce after a two-year absence who would still need between 840 and 910 hours to qualify, and those those seeking maternity or sick benefits would still need at least 600 hours to be eligible.
As far as I can glean, under Mr. Ignatieff’s proposal, a worker who lost his job after working 360 hours over 9 weeks would, after the customary two-week waiting period, be entitled to collect EI for 37 weeks (the amount allowed in regions where the unemployment rate is over 16 per cent after adding in the temporary 5-week extension in regular benefits introduced in March as part of the Government’s Economic Action Plan).
To continue with the arithmetic of this example, if this worker had made $12 an hour or $480 per week for a total earnings of $4,320, he would be entitled to benefits of 55 per cent of his insurable earnings of $360 or $198 per week for up to 37 weeks (calculated using a minimum divisor of 12, which is assumed to be reduced from the current level of 14 reflecting the cut in the minimum entrance requirement, instead of the 9 weeks worked to penalize short-term workers) The total amount of benefits collected could be as high as $7,326. And the amount of the premiums paid at $1.73 per $100 of earnings by the employee and $2.42 by the employer would be $74.74 and $104.54 respectively. This means that the unemployed worker would be entitled to collect as much as $7,326 in benefits based on only $179.28 in premiums.
The rationale for Mr. Ignatieff’s proposal is two-fold. First, the current system is perceived to be unfair because the Variable Entrance Requirements are lower in certain regions of the country tending to favour them over others and to discriminate against workers largely in Ontario and the West. Second, it is argued that increased EI eligibility would provide quick needed support to workers losing their jobs because of the economic crisis and help to support spending and cushion aggregate demand during the recession. These were also the main reasons why the Government extended the duration of benefits by 5 weeks for a temporary year-and-a half period. These arguments are valid in so far as they go, but there are other more important considerations that also need to be taken into account and tip the balance against the proposal.
The big problem with liberalizing EI is that it is not just income support. It also influences behaviour and discourages work. That is why, not entirely successful, efforts have been made over the years by both Liberal and Conservative Governments to tighten up the system.
The major extension of the UI program in 1971 by the Trudeau Government gave rise to to a wide-spread perception that a so-called 10/42 UI system (10 weeks work and 42 weeks of UI benefits), not so different from that proposed by Mr. Ignatieff, had taken root in some rural areas of the country, particularly the Atlantic provinces and Quebec, and that it had created a culture of UI dependence. More specifically, under the rules in effect at the time, it was possible to work for 10 weeks for relatively good wages in a seasonal industry such as a fish plant and collect UI for the rest of the year. The situation reportedly became so bad that a common complaint heard from local businesses was that it was hard to get anyone to work after everyone in the community had earned the necessary UI entitlements, especially at the end of the season when the work might be less than full time and would lessen UI entitlements. The UI data collected at the time revealed an understandable tendency for many people to work the minimum and collect the maximum.
Long periods of entitlement for short periods of work subsidize firms that provided unstable employment. And it should be obvious, to use the jargon currently in vogue, that these are not the firms that are likely to be the dynamic engines of economic growth in a knowledge economy. Another issue is the emergence of political pressure for the Government to introduce bridge programs such as Canada Works to enable workers to meet even the reduced entrance requirements.
The latest measure to tighten EI were implemented by the Liberals in 1996 following an extensive review process that included a report from a Working Group on Seasonal Work and UI that I chaired. While they did not fully tackle the core of the problem, the work disincentives posed by EI were pared back and contained to rural areas of the country that accounted for a small and shrinking fraction of the country’s labour force. This made the EI program much less of a source of structural unemployment than it had been.
It is worth mentioning one caveat though. The current system with its variable entrance requirements based on lagged averages of unemployment automatically reduces entrance requirements and lengthens entitlement periods as the recession deepens. This has the impact of ratcheting up structural unemployment, which will make it more difficult to get unemployment back down to pre-recession levels.
The Liberal Leader is proposing to undo the progress made by his predecessors and extend an automatically liberalizing system that already provides EI benefits far greater than any premiums paid to marginally attached members of the labour force right across the whole country. And instead of ten weeks to qualify, it would only be 360 hours or nine forty-hour work weeks. This could have a substantial adverse impact on the Canadian labour market, perhaps even similar in magnitude to the 1971 UI changes, which were estimated by economists to raise the Canadian unemployment rate by over 1 percentage point.
The disincentive effects of EI will be compounded because the reductions in eligibility requirements will be greatest in the country’s largest cities where the labour force is growing rapidly due to immigration. In 2008, over 247 thousand immigrants came to Canada with two-thirds locating in the three cities of Toronto, Montreal and Vancouver and more than a third to Toronto alone. Similar numbers are expected in 2008. Immigration will not be curtailed by the recession unless target levels are reduced, which seems highly unlikely. And locational choice is largely driven by family ties and contacts.
Many of the newcomers will be forced by economic conditions into undesirable low wage jobs, not so different from those prevalent in rural areas of the country. Under the circumstances, EI benefits supplemented by earnings in the underground cash economy may constitute an attractive alternative to the available regular low-wage employment.
Does it make sense to provide subsidies for not working at the same time that we’re continuing to bring in large numbers of immigrants to meet the economy’s labour needs?
The Liberal Leader may argue that he is only calling for a temporary reduction in entrance requirements as a counter-cyclical measure and that the reduction in entrance requirements would be reversed once the economy recovers and unemployment recedes. However, in support of his proposal for uniform national entrance standards, he also emphasizes the unfairness the current system of Variable Entrance Requirements. How would it be possible to reverse a temporary measure introduced at least in part on the grounds of fairness? Certainly not to go back to something “unfair.”
Mr. Ignatieff fails to specify clearly to what levels the entrance requirements would return after the crisis is over. Would it be to the 420 hours, the current lowest level in the country? If so, the EI system would still be much more generous than it currently is.
There is also the question of the cost of the Liberal proposal. TD Economics (p.10) estimates that the proposed relaxation of entrance requirements would cost $1 billion. And this assumes that there is no changes in behaviour to take advantage of the more liberalized EI regime. The actual long-run cost could turn out to be much higher than such static estimates as it was for the 1971 UI reforms. If so, the higher premiums that would result would be a direct tax on job creation.
Following the meeting of Mr. Ignatieff and Prime Minister Harper on June 17, the Liberals announced that the Government had agreed to establish a working group to develop proposals for Employment Insurance eligibility reform, specifically including improving eligibility requirements in order to ensure regional fairness and allowing the self-employed to participate voluntarily in the Employment Insurance system (another problematic idea proposed by Mr. Ignatieff). The group is to report by September 28. While reform of EI to improve regional fairness is certainly desirable, an across-the-board liberalization of entrance requirements designed to counter the current recession would have long-term adverse impacts on labour supply for all the reasons noted here.
And, on the other hand, it goes without saying that the middle of a recession would not be the appropriate time to standardize entrance requirements at average Canadian levels in the unlikely event that anyone is foolhardy enough to propose raising entrance requirements in high unemployment regions already hard hit by the recession.
It is unfortunate that politics has put EI reform high on the agenda just at the time when the results are likely to be most damaging to Canada’s long-term growth prospects. Hopefully, sound economic analysis will win out over politics. But the prospects don’t look good.