By JUSTIN HATHERLY (AIMS Author)
While Canadians are justifiably proud of the social programs their country offers, there are programs that are poorly designed, riddled with perverse incentives that exacerbate the problem they intend to correct. Employment Insurance (EI) is one such problem.
EI does provide transient income supporter to workers who have lost their jobs without fault, but in its present form increases structural unemployment, distorts national and regional labour markets, contributes to an inadequate level of personal savings and aggravates Canadian productivity challenges.
In 1941, EI was fundamentally built upon classic insurance principles. Recipients had to have a minimum of 180 days of contributions, and were then limited to one day of benefits for each five days of contributions in the preceding five years. Seasonal workers were not eligible for EI on the grounds that they were uninsurable due to frequent unemployment.
However, in 1971 Pierre Trudeau radically transformed the program by expanding eligibility and benefits. Benefits were no longer uniform across the country. Instead, Canada was divided
into EI regions. In areas of higher unemployment, beneficiaries could claim benefits for an extended duration and with fewer weeks of contributions. Despite likely laudable intentions, these alterations produced unintended consequences that still erode Canada’s economic vitality and social fabric.
In areas of high unemployment, the length and accessibility of EI benefits have established a pattern of seasonal work and discouraged segments of the labor force from maintaining consistent employment. Since 1976, the Atlantic Canadian unemployment rate has averaged 12.54% compared to 8.31% in the rest of Canada. Atlantic provinces also have the highest proportion of repeat EI claimants in the country, suggesting a deeply entrenched dependence on the program. Instead of serving as a temporary precaution to assist displaced workers, for many in the region EI has become their main source of income.
The adverse consequences of the EI program are hardly limited to Atlantic Canada. Workers in areas of high unemployment are discouraged from moving to regions with better employment prospects because of easy access to EI coupled with the concern should they migrate and be unable to quickly find work, they would become ineligible for benefits in an area with lower unemployment levels.
Consequently, these disincentives to interregional migration impede productivity and economic growth as industries in the midst of robust growth experience persistent labor shortages. Many commentators have noted the seeming paradox of labor shortages in resource producing Western Canada and elevated levels of unemployment in Eastern Canada. The present design of EI creates incentives that prevent the natural process of migration expected in a well-functioning labour market.
Canada needs an EI program that better balances security for displaced workers with economic efficiency. In my recently published paper, I contend that Canada should base an EI
transformation on successful changes implemented in Chile.
Instead of contributing to a general tax and transfer program, workers would instead contribute to an individual Personal Security Account (PSA). Their contributions would subsequently be invested in a global index of equities and other assets. An independent board would manage the investment of contributions, not unlike those responsible for the Canadian Pension Plan. Upon retirement, any unused balance remaining in a PSA would belong to the worker. When faced with unemployment, funds in these accounts would be used to pay out benefits at a uniform rate
By standardizing eligibility requirements and benefit duration, disincentives to regional migration and aspects of EI that foster disproportionate regional dependency would be eliminated. Additionally, recipients would be depleting a future income stream; beneficiaries would face better incentives to quickly find work. An EI system built on compulsory savings would benefit all Canadians. Western Canadians would carry a lesser burden to transfer more wealth out of their provinces. The federal government would be less tempted to capture EI contributions for other purposes, but it would benefit poorer Canadians in particular, who have less accumulated savings.
Despite the good intentions that underpin the EI program, the current form fails Canadians. Inherently perverse incentives entrenched seasonal work, fostered regional dependency and likely impeded the wider success of Canada’s economy. These proposed reforms would ensure a better balance between social equity and economic efficiency.
Canada deserves better.