Econ 881 – SPS 844

RETHINKING

EMPLOYMENT INSURANCEby

Thomas J Courchene

tom.courchene@queensu.ca

IIGR (Queen’s) and IRPP (Montreal)

February, 2011

For a Brief Legislative History of UI/EI See:http://www.hrsdc.gc.ca/eng/employment/ei/premium_rate/2008/appendix_7.shtml

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UI / EI History: Overview

In 1937, SCC declares the 1935 federal Employment and Social Insurance Act unconstitutional (falls under s.92(13)). (But OK for US)

UI becomes exclusive federal power, s.91(2A) in 1940 via an amendment to the Constitution. The federal Unemployment Insurance (UI) Act passes in 1940. (private sector only, 30 weeks entrance requirement, 1.8% premium up to the av. industrial wage, 60% rep. rate)

This is a key amendment since it eventually allowed Ottawa to:End run “property and civil rights” (s.92(13)) as long as area can be linked to UI/EI: parental benefits. etc

Become a player in industrial Canada (1995 seasonal benefits and 1957 fishers’ benefits, and regionally variable entry and benefits)

Engage in regional policy and violate individual horizontal equity via VERs. This serves to fragment the internal socio-economic union

Divert $60 bill. of excess premiums into Ottawa’s coffers (next slide)On the other hand, EI was the vehicle for enhancing social Canada by introducing “employment benefits” (maternity, parental, compassionate, training).

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EI Financing: Reproduced from Courchene and Allan, Sept. 2009 Policy Options

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UI / EI History: II

1955: Introduced seasonal benefits with eased entry 1971: Major reform. Uniform 8-week entrance period. Coverage

extended to public sector. Sickness, maternity and retirement benefits were introduced (if have 20 weeks of employment), Extended benefits for high U areas, benefit rates go to 75% with dependents, Benefits become taxable. Up to 60 UI regions. Led to 8-42 syndrome (2-week waiting period) for high-U rate regions (see next slide). Big move away from insurance principles . Premiums for employers are 1.4 times those for employees. Ottawa was to bear the costs of UI for U rates above 4%, as well as for fishing, sickness, retirement and maternity. Benefits set at 75% with dependents, 66% without. Benefits: work component (up to 20 weeks, with 1 week of benefits for every 2 weeks worked), up to 12 additional weeks (1 for each additional week above 40 weeks), and a regional component ( 2 weeks for every percentage point by which the regional u t-rate exceeds 4%). Max= 50 weeks.

Variable entry requirements: 8 weeks in 1971, variable entry weeks (10-14) in 1977, 12-20 in 1994, an hours-based VER in 1996 which persists (see later slide) at 420-1680 hours depending on the regional U rate

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EI History: III

Adoption benefits introduced in 1983. 1989 Introduced 10 weeks of adoption benefits payable to men or

women. Also embarked on an active labour market policy, e.g., training 1993, to reduce costs, voluntary quits not eligible and rep rate falls to

57% from 60% (further to 55% in 1994) 1996: Changes from weeks to hours (can accommodate multiple jobs).

At 35 hours per week, the earlier 12 weeks correspond to the 420 hours in Table 1 below. Entrance requirements for new entrants and repeaters was increased to a minimum of 900 hours. Changed UI to EI

2000: Parental benefits expanded from 10-35 weeks, so have one year of combined maternity and parental benefits

Lots of alterations each year 2004 compassionate benefits 2005 Ottawa transfers parental benefits to Quebec for 2006, by

eliminating Quebecers’ contributions for parental benefits and allowing Quebec to levy them (more on this later)

2009 5 weeks more EI benefits (stimulus) + 2010 extended L.T.benefits

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Current System: VERs (Table 1)

VERs ; 420 hours in <6% regions to 1820 hours in >16% regions. Person with 420 hours can get 37 weeks benefits in 16%+ region whereas in <6% region would need 1680 hours to get 37 benefit weeks.

For fishers, set a dollar quota to qualify – can be a little as $2,500 which, for some species requires a good weekend’s work, and a short afternoon for the herring-roe fishery! See Chart 2 below.

Rationale for VERs was that it was harder to obtain a job in high-U regions. But one can lose a job in Alberta and then move to a high-U region to file benefits. Moreover, not clear that it is harder to find a job in traditional high-U region – see the regional allocation of recent beneficiaries in later chart from Globe and Mail. (Table 2 below).

A further challenge is that the percentage of the unemployed who are eligible for EI varies rather dramatically across Canada’s cities. Some of this relates to the VERs but some probably has to do with immigration settlement issues.

Attention now shifts to reform of EI TC-083

Table 1:VERs(Variable Entry Requirements)

Chart 2

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Table 2

Proportion Unemployed Receiving Regular Employment Insurance Benefits, by Major City, Canada, 2004

Source: Battle, Mendelsohn, and Torjman 2006

Proportion Unemployed with no EI Benefits

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Replacement rate is the ratio of UI/EI benefits to employment earnings. Source: Lars Osberg in JDI book on 2009 budget.

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Source: Lars Osberg, JDI volume on 2009 budget

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EI Reform and Social Canada: Motivation/Overview

Variable entrance requirements (re: earlier chart) are increasingly untenable. (but hard to eliminate what are viewed as entitlements)

Regular EI benefits should be insurance based (no long-term benefits for short-term contributions). Should exclude the self-employed.

Arguably, the existence of EI makes designing a state-of-the-art social envelope most difficult because its tentacles are everywhere. For example, employment benefits (parental, etc) should in principle be citizen based, not employment based as in the US, and should not be funded from premiums, particularly employer premiums.

Perhaps Ottawa might consider implementing a GAI / NIT in the context of a revised EI

This may seem be third-rail stuff but, as Brian Lee Crowley noted, the characteristics of the EI program (especially variable entry/benefits and allowing short-term contributions to generate long-term benefits) were driven by the labour surplus (the boomers) while the need to rethink EI is motivated by the likelihood of future severe labour shortages. This may make reform easier.

Now to some details on the above. TC-083

EI Reform and Social Canada: Insurance-based regular benefits

Uniform entrance and benefit duration; Say 1 week of benefits of each week of work for the first 15 weeks, then 1 week of benefits for each 2 weeks of work for the next 30 weeks, and then 1 for 3 up to some overall maximum. Since there are no long-term benefits for short-term work, one can even have a shorter entry point than the current 420 hoursOne alternative way of viewing this would be to remove (over time) all columns other than the first from the existing VER table and to fill in the top of the first column. Above the 19 weeks, would be: 18, 18, 17, 17, 16, 16, 15, 15 and even extending col. 1 further upward. The whole system be more expansive in recessions, and vice versa.

Equal premiums for employees/employers Exclude self-employed because of moral hazard No longer punish new entrants or those returning to LF (as currently) But tightening up EI will reduce the persons that will be able to claim EI

and if they qualify benefits will be fewer Enter the possibility of a GAI/NIT

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EI Reform and Social Canada: GAI/NIT

We have versions of a NIT for kids (refundable child tax benefits) for seniors (OAS/GIS) and for provinces (equalization). To move to a NIT for adults, one could add a refundable tax benefit for adults, run through PIT. Would be financed in part by conversion of the PIT personal/spousal credits etc. into refundable credits. Additional funding could come from CST since welfare costs will fall.

Payments would be monthly and reconciled annually or semi-annually. Provinces could supplement this via their own PIT personal and

spousal benefits Rationale: Ottawa needs to play a larger role in overall redistribution

and specifically in income support. Provinces are ill-equipped to handle distribution issues

It is questionable for Ottawa to arbitrarily extend EI benefits and ignore

those EI exhaustees forced to resort to welfare. Especially the case in Ontario where one has to unload all assets to qualify for welfare.

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EI Reform and Social Canada:Employment Benefits

In principle, employment benefits should citizen-based, funded from general revenues, and certainly not from employer premiums.

Currently, one in three mothers does not access maternity benefits, in part because benefit rates for low-income women are too low. Why not calculate total of what they could collect and then allocate this total over fewer weeks so that resulting benefit is “liveable”.

Access seems easiest in public sector and large corporations, rather than in small business, and on the employee side one presumes it effectively discriminates against single parents.

Are we launched on a US model where a good job is needed to access the full social envelope?

Why exclude self-employed mothers? QPIP has included them in its new (expensive and highly subsidized) system. The Conservatives’ election platform proposed a voluntary program involving 6 months of contributions in order to access 50 weeks. This is so rife with moral hazard and so devoid of any insurance principle that it serves to make the case that these benefits should be citizen-based, not EI-based.

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