Chapter 11: Employment Insurance

Chapter 11: Employment Insurance • When a Canadian becomes unemployed, if they are attempting to find a new job, the government will give them some support through this process • Unfortunately, unemployment can be complicated, with concepts such as labour participation, discouraged workers, labour searching, and other factors • Various changes to EI have come through various approaches to EI

Chapter 11: Employment Insurance • Unemployment in Canada • Why Employment Insurance? • History in Employment Insurance • Labour Market Effects of Employment Insurance • Distribution and Employment Insurance

History – Unemployment Insurance Expenditures • 14.5 Million Canadians covered by Unemployment Insurance in 2008-09 • $9.5 billion on regular benefits • $2.9 billion on family benefits (maternity and parental leave) • $1 billion on sickness • $246 million on fishing benefits • $1.6 billion on training, job creation, self-employment assistance, wage subsidies, and labor market agreements • 1.6 million Canadians received $14.2 Billion

Theory - Unemployment in Canada • There are 3 key categories needed to understand unemployment in Canada: Employed – workers who have a job (regardless of hours), are off work due to illness, vacation, or industrial dispute Unemployed – workers who were available for work and made an effort to find a job during the previous 4 weeks, or who were available for work and waiting to be recalled from a layoff within 26 weeks, or reporting to a new job within 4 weeks

Unemployment in Canada Labour Force = Employed +Unemployed Not in labor force = those who did not have a job and did not actively search for employment (ie: students, early retired, etc) It is important to realize there are THREE important categories.

Unemployment in Canada Labour force participation rate – labour force as a percentage of working age population Employment rate – employment as a percentage of working age population Unemployment rate – unemployment as a percentage OF LABOR FORCE -Note that discouraged workers are not considered to be in the labor force

Unemployment in Canada

Unemployment in Canada Unemployment depends on: • People who lose their jobs and look for a new one • People who find jobs • Unemployed who drop out of labor force (discouraged workers, students, homemakers) • People who enter labour force and look for work

1976-1991 Monthly Labor Force Flows, in 1000’s.

“TRUE” UNEMPLOYMENT? • Should discouraged workers be considered? Discouraged Workers – individuals who have stopped looking for a job because they think that the probability of finding a job is low • Are some unemployed actually looking for work? • How do we take workers who want more hours into account? (partially unemployed) • There are even difficulties in definition

History - Labour Market Trends

Labour Market Trends • Labour participation and employment rate has increased, due to dramatic increase in participation rate of married females • These rates have fluctuated with the economy and the unemployment rate

Unemployment Trends -Canadian unemployment has increased since the 1950’s (4.2%) -Unemployment has been decreasing since 1995 -Note the US-Can gap

Provincial Unemployment -Duration of unemployment can be as significant as unemployment rate

Demographic Unemployment

Country Unemployment -While Canada`s unemployment rate WAS (2009) comparable to Europe, length of unemployment was shorter -This helps workers maintain skills and self-esteem

Theory - Why Employment Insurance? Two key reasons lie behind government provision of employment insurance: • Market Failure • Adverse selection • Moral hazard • Economic cycles • Income Redistribution

1a) Adverse Selection • Some people have higher unemployment and therefore higher demand for employment insurance • ie: Young males without high school • This results in high premiums… • Which results in unappealing insurance for low risk individuals… • Which raises premiums even higher

1b) Moral Hazard • Employers can fire their workers, deciding whether they use employment insurance • Unemployed can lengthen their unemployment time, affecting the amount of EI they receive • ie: not actively looking for a new job • ie: rejecting a lower income job or job in a new area • Insurance company can`t detect this, therefore has to charge higher premiums

1c) Econ. Cycles • During a recession, employment insurance claims rise • During an expansion, employment insurance claims fall • Risk pooling can`t allow a private insurance company to survive econ cycles.

Government and Market Failure • Adverse Selection – public insurance premiums are mandatory and based on average expected loss • Benefits high risk and penalizes low risk • Moral Hazard – unavoidable, but fought through not covering initial unemployment and only covering a FRACTION of earnings • Econ Cycles – The government can better save and borrow to survive cycles

2) EI and Income Redistribution • EI naturally redistributes wealth from those who don’t suffer employment loss to those who do • Since some people have claims more often and longer claims, there is even more redistribution • IS Employment Insurance good as an income redistribution program? • There are those who agree…(next slide) • There are those who disagree…(2 slides hence)

EI and Income Redistribution YES • Employment Insurance supplements (therefore saves on) social assistance • People receiving EI may need less welfare • Some argue that Employment Insurance has less of a work disincentive than typical welfare • There is no implicit tax rate on earnings • EI requires a certain level of work, and therefore is similar to “workfare” (Osberg, 1995) • EI helps those who normally have employment while social assistance helps those who have limited ability to be self-supporting

EI and Income Redistribution NO • Employment Insurance does a poor job of redistributing income to the poor • People in equal positions are not treated equally (horizontal equity) • Tax burdens are not distributed fairly across people with different abilities to pay (vertical equity) • Employment Insurance causes major labour market distortions (firms and workers) • Because its not typical insurance

EI History – 1930’s • 1933 – 25% unemployment, 15% “on relief” • “On relief” largely covered by provincial and municipal governments • 1935 social insurance program ruled ultra vires; outside the federal government’s jurisdiction • 1867 Constitution Act amended (by federal and provincial governments) to allow for federal unemployment insurance

EI History –1940’s and 1950’s • 1940 Unemployment Insurance Act • Covered jobs with MODERATE risk of unemployment (not high risk – agriculture, forestry, fishing - or low risk – police, army, government jobs) • 42% of labour force • 50% of wage benefits, plus 15% if married • lasting for 1/5 of days worked in last 5 years, minus 1/3 of days already claimed in last 3 years • 1950’s – UI extended to seasonal workers and “self-employed” fishermen • Important move from original EI goals

EI History –1971 Reforms • 1971 Unemployment Insurance Act (Bill C-229) • Covered 93% of labor force (excluding self-employed) • Minimum eligibility – 8 weeks of work • Benefit 66% of wage, 75% with dependents • Had a maximum insurable earnings level • Sickness and maternity benefits increased • Duration linked to weeks worked in qualifying period • Increased when national unemployment exceeded 4% • Increased when regional unemployment exceeded national by 1-3% (regional extended benefits)

EI History –1971 Reform Impact • Unemployment was constant between 1971 (6.4%) and 1972 (6.3%), yet: • People covered: 5.4 million to 7.8 million • Weeks of benefits: 22.6 million to 30.5 million • Average weekly payment: $40.28 to $61.79 • Expenditure skyrocketted: • $0.890 billion to $1.87 billion • Expenditure rose from 0.9% of GNP in 1971 to 1.9% in 1975

EI History –1975 Reforms • Those who quit or were fired from misconduct couldn’t claim for 6 weeks (up from 3) • Age limit reduced to 65 years (from 70) • 75% dependent coverage eliminated (all 66%) • Increased benefits became linked to an 8 year moving average, instead of 4% trigger

EI History –1977 Reforms • New entrants, re-entrants to labor force and people with repeated claims needed more weeks of employment to qualify • Exemptions for repeat claimants in high-unemployment regions • Benefits reduced to 60% of wage (from 66%) • High income earners clawed back at 30% in net income was 1.5 times maximum insurable earnings

EI History –1980’s • Unemployment went from 7.6% (1981) to 11.9% (1983) • Benefits rose from $4.76 billion to $10.1 billion • Macdonald Royal Commission on the Economic Union and Development Prospects for Canada (1985) concluded: • UI increased unemployment rates since 1971 • Income redistribution should be replaced by a NIT The commission was opposed by Altantic Canada and labor movement and was never adopted

EI History –1980’s • 1989 Bill C-21 did some changes: • UI funds could be used for training, relocation assistance, and other employment measures • This was meant to fight long-term unemployment • Repeat users no longer had different qualification provisions • UI became entirely funded by employer and employee contributions (no general fund government funding) (as of 1991-1992)

EI History –1990’s • Unemployment rose to 11.3%, causing an UI deficit • Government increased employee and employer contributions • This may have lead to more lay-offs • 1993 benefits reduced to 57% (from 60%) • Those who quit without just cause became ineligible for UI benefits

EI History –1990’s • 1994 – UI eligibility in high unemployment regions increased to 12 weeks (from 10) • 20 weeks was required in other regions • Benefits could last from 17 to 50 weeks depending on weeks worked and regional unemployment • Benefit reduced to 55% (from 57%) • But raised to 60% for low-income recipients with dependents • Employee contributions increased again

EI History –1996 Reforms • 1996 Employment Insurance Act (Bill C-12) made major changes in: • Eligibility • EI Benefits • Duration of Benefits • Intensity Rule • Financing

1) Eligibility • 1996 Employment Insurance Act eligibility: • Eligibility based on HOURSof last 52 weeks • 420-700, depending on unemployment rate • 910 hours for new entrants to labor force and those entering after 2 years • 600 hours for sickness, maternity, or parental benefits • Fishing benefits depend on earnings in a fishing season ($2500 to $4200 depending on regional unemployment) • This change took part time work and seasonal work into account much better

2) EI Benefits • 55% of insurable earnings, to a maximum of $39,000 (reduced from $42,380) • This held constant until 2006 • Maximum Insurable Earnings (MIE) $44,200 in 2011 • Low-income claimants with children can get a Family Supplement to increase their benefits to 80% (family income less than $25,921) • 5.9% of EI claimants received this supplement • Incomes exceeding $48,750 repay 30% of benefits

3) Duration of Benefits • 2 week waiting period • 50 maximum weeks (reduced to 45 weeks recently) • 15 weeks maternity or sickness benefits • 10 week parental benefits (increased to 35 weeks in 2000) • Temporary extensions put in place in 2009

4) Intensity Rule • Benefit rate was reduced by 1% (maximum 5%) for every 20 weeks of regular or fishing benefits • Intended to discourage repeated EI use • Eliminated in 2000

5) Financing • 2010 Contribution rates are $1.73 for employees and $2.42 for employers for every $100 insurable earnings • MIE $43,200 • Employer rate is 1.4 times employee rate • Maximum $730 for an employee and $1,024 for an employer per year

EI Today • Insurance: • Premium financing • Payouts when unemployed • Redistribution: • Benefit clawbacks for high incomes • Variable entrance requirements • Family Supplement • Self-Employed fishermen benefits

Theory - Labour Market Effects of EI • Employees and employers can influence EI claims (Moral Hazard) • Studies on the relationship between EI and Unemployment have been inconclusive (Corak 1994) • EI has so many factors, it is hard to gauge its ``generosity`` • Many other factors also affect the labor market (oil prices, interest rates, recession, etc)

Labour Market Effects of EI • The labour market effects of the Canadian Employment Insurance System can be divided into: • Direct Effects – effects on labor market dynamics (ie: employment flow chart, slide 9) a) layoffs b) quits c) duration of employment d) labour force participation)

Labour Market Effects of EI 2) Systemic Effects - changes to the economic environment a) industrial mix b) labour mobility c) education 3) Macroeconomic Effects (automatic stabilizing effects)

1) Direct Effects • Layoffs and hiring are caused by: • Seasonal variations in demand (not insurable, as they are highly predictable) • Business cycle fluctuations in demand (main focus of EI) • Long term changes in the economy (requires retraining)

1a) Layoffs • From 1983 to 1999, • Permanent layoffs occurred in 5.7% (1999) to 7.7% (1983) of jobs • Temporary layoffs occurred in 7.3% (1989) to 9.7% (1992) of jobs • Additional workers quit • EI can distort a firm`s layoff decision:

1a) Layoffs • When a firm needs to cut costs, including labour, it can reduce hours or lay off • With EI, laying off (which has EI support) is more attractive than reducing hours (which has no EI support) • Therefore, typical EI encourages layoffs • EI Work-Sharing Programs (started in 1982) allow reduced hours and EI to discourage layoffs

1a) Layoffs • Some firms may design job length according to minimum EI work requirements • Green and Riddell (1995) found an increase in EI requirements from 10 to 14 weeks of work in high unemployment regions in 1990: 1) REDUCED unemployment and 2) increased average length of employment

1b) Quits • Prior to 1993, workers who quit got UI in Canada but not the states, resulting in: • Equal job quitting in Canada and the US • 20.6 weeks average unemployment in Canada • 11.2 weeks average unemployment in US • (Baker et al, 1996) • If EI applies to quitters, the unemployment rate is increased by longer job searches

Chapter 11: Employment Insurance