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Canada’s declining social safety net – EI reform & Budget 2009

Canada’s declining social safety net – EI reform & Budget 2009. Lars Osberg Economics Department Dalhousie University Conference: The 2009 Federal Budget: Challenge, Response and Retrospect John Deutsch Institute May 7-8, 2009 - Queen's University.

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Canada’s declining social safety net – EI reform & Budget 2009

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  1. Canada’s declining social safety net – EI reform & Budget 2009 Lars Osberg Economics Department Dalhousie University Conference: The 2009 Federal Budget: Challenge, Response and Retrospect John Deutsch InstituteMay 7-8, 2009 - Queen's University

  2. Now that we need a safety net…OECD Economic Outlook March 2009 http://www.oecd.org/dataoecd/18/1/42443150.pdf

  3. UI/EI Replacement Rate – 38 years of declineThe average of the gross unemployment benefit replacement rates for two earnings levels, three family situations Source: OECD, Tax-Benefit Models. http://www.oecd.org/document/3/0,3343,en_2649_34637_39617987_1_1_1_1,00.html ; The Canadian Labour Force Participation Rate Revisited: Cohort and Wealth Effects Take Hold Steven James, Tim Sargent, Russell Barnett and Claude Lavoie Working Paper 2007‐01, Finance Canada, Page 11

  4. Replacement Rate: Relatively low by OECD standards

  5. “it is important to remember that only insurable earnings up to the MIE are covered by the Employment Insurance Program” REPORT OF THE CHIEF ACTUARY TO THE EMPLOYMENT INSURANCE COMMISSION ON THE EMPLOYMENT INSURANCE PREMIUM RATE AND MAXIMUM INSURABLE EARNINGS, 2009:

  6. The Big Issue – EI is much harder to get, especially since 1996

  7. Responding to Need (a bit)

  8. Formula-driven response to labour demand variation? • IMF: “the role of fiscal policy as a macroeconomic stabilizer … could be boosted by making regular tax and transfer programs more cyclically responsive. For example, the generosity of unemployment insurance systems could be automatically increased when the economy is in a downturn and jobs are harder to find” • IMF World Economic Outlook, October, 2008 Foreword page xiv • Political Economy Costs Large • Regional stereotyping & erosion of common polity

  9. Understanding Unemployment and (Un)Employment Insurance • 1970s/1980s literature • UI incentive effects to labour supply/search • Unemployment ≈ “Leisure” • Explosion of “Happiness” literature in 1990s • Large Negative Impact of unemployment • Both unemployed & employed miserable when U rate rises • Risk-averse workers facing possible job loss, unable to smooth consumption privately • Rationally willing to pay for insurance coverage

  10. Canadian fiscal peculiarities • EI Account pays for: • Maternity benefits • Federal deficit reduction in 1990s • Training & employment services • Social decision to fund from EI premiums • payroll tax base NOT normal OECD practice • Defensible expenditures on merits • But NOT = “social safety net” for risk of earnings loss during recessions • Regular Benefits + Admin ≈ 60% of EI expenditure

  11. Downloading Cyclical Risk • Recessions of early 1980s & 1990s • Greater UI coverage + Social Assistance • Ottawa cost-shared SA with provinces • Since 1996 • SA costs now 100% paid by provinces • Individuals / Families • Less coverage & shorter, lower benefits under EI • Lower real value of SA benefits • Less ‘Automatic Stabilization’ implies greater cyclical risk • Larger share of greater cyclical risk is now borne by families & provinces

  12. Budget 2009 response to “worst global recession since 1930s” ? • No change in EI eligibility or replacement • Increase in duration of benefits • + 5 weeks (Canada) • + 13 weeks (USA) • Cost = 0.037% GDP • = $ 575M / 1560 B (2009) Budget 2009 Page 204 = 3.42 % of projected EI Premiums Nil change in “social safety net” Substantially inferior to previous recessions & OECD norm Marginally inferior to USA 2009 Budget 2009 emphasizes training expenditure + premium freeze

  13. Implications of Inadequacy • Training emphasis of Budget2009 makes sense IFF ‘short, sharp blip in trend growth’ • Social returns nil if general excess supply of skills • But not credible • OECD & IMF & others – 10.5% unemployment at least through 2010, & then…..???? • Benefits exhaustion @ 10%+ Unemployment • Social Insurance for market income risk • Quid pro quo underlying Globalization & Market-orientated policy reforms • Political Economy Implications of generalized job insecurity & uninsured mass unemployment?

  14. Needed EI Reforms • Easing of entrance requirement • Tier II for longer term unemployed • > 50 weeks – not likely to be rare in 2010+

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