Halifax – Unemployment Insurance has sent shock waves of economic distortion across Atlantic Canada, stifling both economic growth and adjustment to changing conditions.

Radical reform, combined with major reductions to the UI system, is required to combat a dependency dynamic which permeates the Atlantic economy, according to the most recent AIMS Research Report Towards Sustainable Development in Atlantic Canada: A Case for UI Reform, by Memorial University economics professor Doug May and Morley Gunderson, Director of the Centre for Industrial Relations at the University of Toronto, where Gunderson is also an economics professor. The report is being released today.

The authors argue that the federal government’s proposed UI reforms fail to address in a substantive manner UI-induced economic distortions, and, bizarrely, the reforms actually increase the inequity in the distribution of UI benefits which already disproportionately favours affluent families.

Creating a culture of dependence
“The current UI/make-work syndrome has … resulted in an assault on the fundamental values which have sustained families and communities for generations. These are the values of independence and self-reliance,” May and Gunderson write.

More and more, Atlantic Canadians are directing their energies to “serving the UI system and in trying to maximize the monetary rewards associated with it. People are increasingly expecting government to provide long term solutions to their economic circumstances.”

The paper details how UI has created a new economic dynamic in Atlantic Canada: people across the region have altered their economic behaviour to tap into UI. This inhibits the region’s ability to generate economic activity and jobs in new growth industries. UI draws the region’s resources to low-skill, traditional, seasonal occupations in rural communities, which the program disproportionately subsidizes. People become more attuned to listening to signals from government than from the marketplace, the authors say, and this bodes badly for the region’s economic future unless the UI system is completely overhauled.

AIMS president Brian lee Crowley praises May and Gunderson for “grasping the human dimension of the costs of UI: the building of devastating over-capacity in the fishing industry; the disincentive for young people to get vital training; the distortion of wages and other labour market signals; the stifling of managerial skills; and the channelling of the region’s enormous entrepreneurial capacity into maximizing returns from the UI system.”

Inadequacy of Ottawa’s proposed reforms

May and Gunderson argue that Ottawa’s proposed UI reforms, unveiled late last year, do little to correct UI’s economic distortions and make worse the bizarre distribution of UI benefits which disproportionately favours affluent families.

“This is no time to be drawing back from reform now that we can clearly understand the hidden economic distortions that UI has created in Atlantic Canada,” says Doug May, a member of AIMS Board of Research Advisors. May is concerned that new Human Resources Minister Doug Young may weaken the already inadequate package of reforms proposed late last year by then Human Resources Minister Lloyd Axworthy. In particular, May worries about the ongoing entrapment of our youth in the UI syndrome.

Under the reforms, UI will be renamed Employment Insurance, but it will continue to subsidize seasonal, low skill industries and it will leave in place regionally extended benefits for high unemployment areas. This will continue to suppress the reallocation of resources to growth industries and areas, and it will continue to discourage skill-building.

And, while the reforms reduce benefits for high income families, in most cases low income families face even greater reductions. Most UI families with incomes over $50,000 will suffer a loss of less than one per cent in disposable income; most with incomes under $20,000 will face reductions of 3-to-5 per cent.

The paper examines two comprehensive proposals for reform – one put forward by the Newfoundland Royal Commission on Employment and Unemployment in 1986 and the other by one of the paper’s authors, Doug May, in the C. D. Howe study, Between a Rock and a Hard Place: Atlantic Canada and the UI trap.

The first would basically replace the UI system with a combined guaranteed annual income and earnings supplement program. Unlike UI which creates a disincentive to work (because one forgoes UI by working) the earnings supplement would increase the incentive to work by augmenting earnings.

May’s proposals would maintain UI, but would strip it of its social assistance components – which are badly misplaced in a program originally intended as an insurance program – and transfer this area to income support programs and the tax system. May would also remove regionally augmented benefits, dramatically reduce payouts to high income families and restrict the ability of new entrants to claim UI.

May and Gunderson do not recommend one approach over the other, but instead argue that UI needs the type of complete overhaul envisioned in these two proposals. The UI debate should be about such fundamental issues, they say, rather than about tinkering at the margins of the current system.

As Crowley notes, “This paper documents the shortcomings of the proposed federal reform, and sets those shortcomings against a clear-eyed analysis of the obstacles that UI throws in the path of sustainable economic development.”

For more information, contact:

Brian Lee Crowley, President, AIMS,
Fred McMahon, Senior Analyst
(902) 429-1143