Here’s a skill-testing question: Why does Maine, with neither oil wells nor car assembly plants nor stock exchanges, now have an unemployment rate of 3.9 per cent? And why does New Brunswick, a mere flap of the flag away, now have an unemployment rate of 9.1 per cent, more than 130 per cent higher? The state and province share a common border, common assets (forests and fish) and common economic characteristics (lower incomes, slower population growth).
They differ in one important way. Maine’s unemployment insurance program is owned and operated by the state, which requires it to pay its own way. New Brunswick’s is owned and operated by the federal government. Could the difference in ownership and management of these programs explain the extraordinary employment gap between these neighbours?
Well, yes, and now we have the academic research confirm it. Using Maine and New Brunswick as “a dynamic natural experiment,” two economists have analyzed the unemployment history of these jurisdictions across 50 years. Chris Riddell (Queen’s University) and Peter Kuhn (University of California at Santa Barbara) conclude in a report published earlier this year that Canada’s notoriously generous UI benefits are indisputably responsible for New Brunswick’s higher level of unemployment. The report is more proof that you get more of what you subsidize – including voluntary unemployment.
Messrs. Riddell and Kuhn observe that, historically, Maine had higher levels of unemployment than New Brunswick. Canada’s UI programs began in 1941 when the provinces ceded the job to the federal government. In the 1950s, Ottawa expanded UI benefits; by 1953, New Brunswick reported a higher unemployment rate than Maine. In the 1970s, the government expanded UI benefits again; and New Brunswick’s unemployment rate increased again – this time lodging at 12 per cent or higher. In Maine, the corresponding rate was 8 per cent. In these years, many Canadians came to regard UI as “Lotto 10-40,” meaning you needed to work for only 10 weeks to collect UI payments for 40 weeks – and to do so without penalty year after year.
Maine, on the other hand, has operated its UI program with minimal changes in the past five decades. The state requires people to work a full year before becoming eligible for UI, pays lower benefits for shorter periods and reduces benefits for repeat claimants.
For direct comparisons, Messrs. Riddell and Kuhn usually take unemployment numbers from Maine’s six northern counties, most similar to New Brunswick. By 1980, they found, 10 weeks of work a year in New Brunswick, on average, produced (with UI benefits included) 33 weeks of income; in Maine, the same 10 weeks produced 13 weeks of income. By 1990, 6 per cent of men in Maine worked less than six months a year; across the border, 20 per cent of men worked less than six months a year. In Maine, 14 per cent of women worked less than half the year; in New Brunswick, 26 per cent.
Messrs. Riddell and Kuhn report this astonishing calculation of UI incentives: For every 10-per-cent increase in UI income for New Brunswickers who worked less than half the year, 10 per cent more people reduced their work to less than half the year. In both Maine and New Brunswick, seasonal work has always been a part of rural subsistence. In Maine, seasonal work has declined. In New Brunswick, it has increased. Messrs. Riddell and Kuhn say Canada’s UI benefits for seasonal work have “preserved a way of life forced into extinction by market forces elsewhere.”
By 1990, UI income had become so pervasive that one male worker in four received UI. UI payments produced 6 per cent of New Brunswick GDP; in Maine, 1 per cent. It accounted for 25 per cent of all government income transferred to New Brunswickers (including Medicare); in Maine, 5 per cent. Messrs. Riddell and Kuhn conclude Canada’s UI program “can account for virtually all New Brunswick’s decline (absolute and relative) in full-time work among men.”
Ottawa purported to reform UI in 1996. It did change the name (to EI). Mr. Riddell says the changes were so insignificant they “weren’t worthwhile incorporating.” And the work gap remains. With a labour force now of 385,000, New Brunswick has 35,000 unemployed. With a work force of 735,000, Maine has 29,000 (using August, 2006, numbers). Transfer New Brunswick’s jobless rate to Maine and the number of unemployed workers rises to 65,000.