Skip to main content

“I am a Canadian, free to speak without fear, free to worship in my own way, free to stand for what I think right, free to oppose what I believe wrong, or free to choose those who shall govern my country. This heritage of freedom I pledge to uphold for myself and all mankind.” ~~ John G. Diefenbaker

FRASER INSTITUTE – Reforming Employment Insurance for the 21st Century

 


Notwithstanding the long history of unemployment insurance programs in Canada, as well as substantial modifications to the programs over time, employers, researchers, and even the current federal government continue to express concerns about the existing Employment Insurance (EI) system. 

 

Indeed, in the fall Throne Speech, Prime Minister Justin Trudeau stated that the COVID-19 pandemic has shown the need for a “21st century system,” including coverage for the self-employed and those in the “gig economy.”

 

The current EI system is funded through a payroll tax imposed on employers and employees. EI benefits are a function of the magnitude and duration of unemployment. In this regard, the COVID-19 crisis can be expected to increase required benefit payments while also harming the economic base for the payroll tax. Specifically, it is reasonable to expect that unemployment rates in Canada will remain relatively high for the foreseeable future, while businesses in hard-hit sectors such as tourism, hospitality, and transportation will continue to experience financial distress. Hence, the EI system will face financial pressures in the future, especially with the expiration of special funding programs put in place by the federal government to deal with the economic contraction caused by the pandemic.

 

The anticipated EI funding challenges amplify calls for implementing design changes to the existing EI system. Specifically, they intensify the need for policies that make the EI system both more efficient and more equitable. In this context, greater efficiency means reducing the magnitude and duration of unemployment associated with what economists refer to as moral hazard.

 

Moral hazard encompasses situations in which individuals or organizations that enjoy financial protection against unfavourable outcomes engage more intensively in behaviour that increases the likelihood of those outcomes.

 

In the case of EI, the concern is that incentives to remain employed or to become reemployed will be mitigated by having access to insurance benefits. Simply put, making it easier to qualify for EI benefits and increasing the generosity of those benefits exacerbates the risk of moral hazard with consequent increases in the unemployment rate and the average duration of unemployment.

 

The empirical evidence for Canada suggests that pre-COVID, the EI system erred on the side of encouraging labour market inefficiencies by encouraging and sustaining seasonal employment and repeated episodes of unemployment, particularly in Atlantic Canada. The system also indirectly subsidizes firms to use inefficient ratios of labour to capital by providing those firms with ready access to a continuing available pool of temporary workers who can afford to work in temporary jobs because they receive unemployment benefits.

 

By calibrating eligibility for EI benefits and the generosity of those benefits to regional unemployment rates, the EI system also creates significant inequities. In particular, individuals who were formerly employed in the same occupations prior to becoming unemployed are treated differently depending upon where they reside.

 

Canada’s EI system could be made more efficient and arguably more equitable by making it more of an experience-rated system. Moving in this direction would involve calibrating EI premiums paid by employers and employees so as to reflect more closely historical claims made for EI benefits.

 

Any such design change could be supplemented by initiatives to lengthen the working period required to file for EI benefits and to “front load” benefit payments. Such changes would promote reduced unemployment and shorten the average duration of unemployment by discouraging moral hazard in labour markets.

 

It must be acknowledged, however, that this redesign of the EI system might impose socially unacceptable hardships on lower-income individuals and families who experience unemployment. This latter concern might argue for a separate income-support program funded from general tax revenue that supplements EI benefits. In this regard, arguments can be made that special benefits currently funded by the EI program, such as parental leave, should also be funded by general tax revenues, especially if the EI program is made more of an experience-rated system of insurance.

 

The implementation of Unemployment Insurance Savings Accounts (UISAs) would be a substantial redesign of the EI program and could address the moral hazard problem confronting the program. UISAs are mandatory personal savings accounts into which employers and employees make payroll tax contributions. The contributions are the personal assets of the account holders. The funds accumulated through payroll taxes and deposited in individual savings accounts are invested in a diversified portfolio with interest and capital gains reinvested in the accounts. The management of savings account portfolios can be delegated to one or more qualified wealth management companies. Employees can withdraw funds from the accounts during periods of unemployment.

 

Since positive balances in a UISA account are personal assets (even including to the extent that they can be passed on to one’s heirs at one’s death), individuals should be motivated to remain employed and, if laid off, to engage in efficient search behaviour and thereby avoid extended periods of unemployment.

 

An important issue would arise in the case of unemployed individuals with insufficient balances in their UISAs to support themselves adequately during periods of unemployment. One way to address this issue is to have a parallel program funded by general tax revenues from which benefits are paid to unemployed individuals with insufficient balances in their accounts. An alternative approach is to make low-interest loans to those individuals from the publicly funded program with loans repaid as individuals reaccumulate positive balances in their personal accounts.

 

Projections using relatively conservative forecasts of future investment returns suggest that the average Canadian worker would accumulate a positive balance in their UISA after five years of employment that would provide essentially the equivalent insurance coverage available under the existing EI program.

 

While there are complicated implementation issues associated with any such substantial redesign of the EI program, Canada could be guided by the experiences of a number of countries that have implemented UISAs.

 

Personal savings accounts would enable most Canadian workers to self-insure against unemployment and represent a feasible and arguably a more efficient alternative to the current EI system.

Comments

Popular posts from this blog

It seems the call for blood donors is being responded to, however ... “This effort is a marathon, not a sprint” says Canadian Blood Services

A week and a half ago I wrote the commentary ... “ While the national inventory is currently strong, an increase in blood donor cancellations is a warning sign of potential challenges to maintaining a health inventory of blood ” It was written as a result of talk about a potential blood shortage that would occur if people stopped donating due to the COVID-19 virus. It seems the call to Canadians was responded to, however, as I was told this afternoon ... “ T his effort is a marathon, not a sprint ”. As it now stands now, donors are able to attend clinics which are held in Vancouver (2), Victoria, Surrey, and in Kelowna, so I asked if there any plans to re-establish traveling clinics to others communities - for example in Kamloops, Prince George, Prince Rupert, Revelstoke or Cranbrook, and perhaps further north at perhaps Ft. St. John? According to Communications Lead Regional Public Affairs Specialist Marcelo Dominguez, Canadian Blood Services is still on

FEDLSTED -- Rules will have to relax-- the question is how and when

The media has created a fervour over the mathematical models that allegedly help governments predict the future of Coronavirus infections in the general population. Mathematical modelling has limited use and value. We need to understand is that the data available on Coronavirus (COVID-19) infections in Canada is far too small for statistical reliability. The data available for the whole world is useless due to variables in how nations responded to Coronavirus infections. There is no commonality in steps taken to combat virus spread and no similarity in the age demographics of world nations, so the numbers you see on the daily tracking of world infections are not useful in developing a model of infection rates that can be relied on. Mathematical models of the future spread of Coronavirus are better than nothing, but not a whole lot better.  Mathematical models must include assumptions on virus spreads, and various factors involved. As they are used in projections, a small erro

WUN FEATHER -- can we just put those two names to bed for a while? You can call me an ‘Indian’ and I won't mind. And let's not call the farmers and ranchers ‘Settlers’ anymore

Hey there # TeamCanada !   I can't take it any more! Well, I guess I can, but I don't want to. I want to talk about the names we call each other. My very best friends, and all my Elderly Aunts and Uncles call me an Indian. I have walked into the most magnificent dining hall at the Air Liquide Head office, Quai D'orsay in Paris, France, surrounded by the worlds top producing Cryogenics team, and Patrick Jozon, the President of Air Liquide, has seen me enter the room, and yelled: " Bonjour! There is Warren! He is my Indian friend from Canada! He and I chased Beavers together in Northern BC!" And over 400 people turned to look at me and then they all smiled, and nodded. To most European people, an Indian is an absolute ICON!   The ultimate symbol of North America. They love us. And then, one time I had just gotten married and took vacation days off to take my new wife to meet my Grandmother; I was so proud. But as soon a

Labels

Show more