EI Lessons From South Of The Border

Commentary, Welfare, John Williamson

If Canada’s Employment Insurance (EI) program is made more generous — as opposition parties in Ottawa are demanding — the result will be a permanent increase in the unemployment rate. There’s no two ways about it. The rejoinder to any politician, columnist or economist that scoffs at the suggestion that an economy can be derailed by easier social assistance is Atlantic Canada.

Federal government changes in the 1970s to EI made leisure more attractive by paying richer benefits in areas of high unemployment. The result was predictable: Some people decided collecting pogey was preferable to extra work. It was a rational response to lousy public policy. The result is that the Atlantic region has suffered from two conflicting problems at the same time — high unemployment and a labour shortage.

Implementing these looser EI rules across Canada would have the same damaging result. It isn’t a question of a unique east-coast culture that favours idleness. We should not forget that in the mid-1990s, an astounding one in nine people in Ontario were on welfare as a result of generous payments.

EI is a byzantine system with different rules for workers. In parts of the country with relatively low unemployment, 6% or less, it can take about 18 weeks (700 hours) of work to qualify for assistance. In places where joblessness is over 13% benefits can flow after working as little as 10.5 weeks (420 hours). All said, Canada has 58 different EI zones.

Opposition leader Michael Ignatieff is calling on the governing Conservatives to dramatically reduce the EI qualification period. But the Liberals think even the current minimum 420 hours of work is already too punitive. Instead, they are proposing a mere 360 hours of work to qualify. As economist Jack Mintz has written on these pages, “Under [Mr. Ignatieff ’s] proposal, someone could virtually work each summer (about 45 days) to claim benefits for the rest of the year.” The result of such generosity would be an increase in the number of people working less.

Consider New Brunswick and the U.S. state of Maine. These two neighbouring jurisdictions have much in common. Both are located in the eastern periphery of the continental market, they each rely on a large resource sector and they have below-average incomes. Where they differ is with jobless benefits and long-term unemployment.

According to a report published by the Fraser Institute in 2006, sourced from a National Bureau of Economic Research paper, Canada’s more generous benefits had a “dramatic impact” on the use of EI and the province’s labour market. People in N.B. claimed more unemployment and worked less than workers in Maine. The combination of seasonal benefits and larger payments caused a large gap to emerge in the Maine-N.B. unemployment rates in the mid-1970s.

The report, entitled “The Long-Term Effects of Generous Income Support Program: Unemployment Insurance in New Brunswick and Maine, 1940-1991,” found only 5.7% of male workers and 3.3% of female workers in Maine collected benefits in 1990. Cross the northern border into Canada and 29.5% of male workers and 29.7% of female workers were on the dole. The authors estimated more liberal benefits in N.B. accounted for two thirds of this difference. They also found that since 1982, the joblessness rate in N.B. has consistently been above 12% whereas the out-of-work rate in Maine has routinely been below 8%.

The Atlantic provinces can afford such a rich system because workers in the rest of Canada pay for it. EI payroll taxes paid by central and Western Canadians make it possible. These workers transfer more than $500-million in benefits annually to the East Coast. But that’s not the worst part. The Atlantic EI scheme retards job creation by making it more costly for business to hire workers.

Companies that have, in the past, been ready to hire could not find enough workers willing to trade leisure for regular work. This choice is influenced by generous EI payments and explains the paradox of both high unemployment and a labour shortage in the region. As a result, companies invest less in Atlantic Canada or leave in search of more willing workers in New England or central and Western Canada. The result is more unemployment and an exodus of young people to the United States or other parts of the country. It is a vicious circle with less economic growth, more dependency and declining opportunity.

People assume that higher unemployment rates necessitate more EI. But it is worth considering to what degree generous EI has caused chronic unemployment. Indeed, if EI rules were similar across provinces, it would be an incentive for workers in areas with high unemployment to move to locations with more jobs.

That EI should be reformed is not disputed. But lowering the eligibility rate to 360 or even 420 hours would blow a permanent hole in Ottawa’s balance sheet, damage Canada’s labour market and be costly to future job creation.

EI should operate as an insurance program. Frequent users should either pay higher premiums or receive lower benefits. Similarly, businesses that routinely abuse the system by “laying off ” workers and hiring them back weeks later should pay more. But a recession is hardly the time to make these changes.

If benefits are inadequate in the current economy, the solution might be to provide temporary payments outside of EI. Indeed, it is regrettable the government dedicated a $10.5-billion bailout to subsidize the jobs of autoworkers instead of making that money available to unemployed Canadians.

The Conservatives’ program of massive deficit spending is bad news for taxpayers because it will mean paying more interest to service the national debt. But Ottawa’s reckless fiscal expansion should not hurt employment growth prospects in the middle and long term, provided government expenditures are curtailed and taxes are not increased. The same cannot be said about a more generous EI system. It would be detrimental to labour market growth. Mr. Ignatieff’s proposal is ill-conceived and the government should ignore him.

John Williamson is a Chevening scholar studying at the London School of Economics, a senior fellow with the Fraser Institute and a fellow with the Manning Centre for Building Democracy.
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