Employment Insurance (EI) has turned into a dysfunctional tax and is not an appropriate source of income replacement in a recession. Those are two of the key conclusions in AIMS latest Commentary by UPEI economist Robin F. Neill.
The Commentary, titled Using a wrench as a hammer: Why EI is the wrong tool to respond to loss of income in an economic downturn, examines the employment insurance program and finds it wanting.
“By 1996 EI was so bent out of shape that it had become, in effect, a dysfunctional tax. Now in 2009, when many fear the return of conditions that approach those of the 1930s, it may be possible to forget about EI and discuss instead our original purpose: compensatory income support,” says Neill, Adjunct Professor at the University of Prince Edward Island.
Neill suggests that as EI was changed over time people became distracted from its original purpose. He argues the current economic downturn gives us a golden opportunity to refocus on our intentions and start over.
EI was originally intended to deal exclusively with cyclical unemployment like that seen during The Great Depression, wide scale unemployment caused by cyclical adjustments in the market place. In Using a wrench as a hammer, Neill says this unemployment is painful but is always only temporary. He suggests offering temporary income relief and other training opportunities funded not by premiums but by federal debt. Society as a whole benefits from this counter-cyclical stimulus and so society as a whole should in turn bear the cost.
With cyclical unemployment it is very difficult to predict when it will happen or how long it will last. The new “compensatory income support” would see benefits go up when the economy is in crisis and disappear entirely when the economy is booming,” Neill explains.
Neill does not, however, see “CIS” replacing EI but instead complementing it. Neill argues that EI should be fully experience rated and operated as a true insurance against other forms of unemployment (structural and frictional). This would deal with many criticisms of the current approach including the three biggest: people who pay premiums but can’t collect; paying people, through EI, not to work; and, EI being a tax and not a premium.
“This new EI fund would not be general revenue to the government but would be handled, and regulated, much as any other insurance fund is, to the benefit of the policy holder,” says Neill.
The premiums people pay into EI would be subject to the amount of money they currently make and also to the risk they face of losing their employment. For example, a doctor will pay a higher premium than a nurse because of the variance in the wage. People with a higher risk of losing their job would also pay a higher premium (as would their employers), such as those working in industries which fluctuate with the market such as, construction.
The EI program as it is now creates more problems than it solves. The economic downturn is not only the perfect opportunity to take the program from a dysfunctional tax to functional insurance but is a crucial lens to allow us to refocus on our original intent: helping Canada and Canadians weather economic crises.
To read this Commentary, click here.