1. Chapter 11: Employment Insurance  When a Canadian becomes unemployed, if they are attempting to find a new job, the government will give them some support through this process  Unfortunately, unemployment can be complicated, with concepts such as labour participation, discouraged workers, labour searching, and other factors  Various changes to EI have come through various approaches to EI

2. Chapter 11: Employment Insurance  Unemployment in Canada  Why Employment Insurance?  History in Employment Insurance  Labour Market Effects of Employment Insurance  Distribution and Employment Insurance

3. History – Unemployment Insurance Expenditures  14.5 Million Canadians covered by Unemployment Insurance in 2008-09  $9.5 billion on regular benefits  $2.9 billion on family benefits (maternity and parental leave)  $1 billion on sickness  $246 million on fishing benefits  $1.6 billion on training, job creation, self- employment assistance, wage subsidies, and labor market agreements  1.6 million Canadians received $14.2 Billion

4. Theory - Unemployment in Canada  There are 3 key categories needed to understand unemployment in Canada: Employed – workers who have a job (regardless of hours), are off work due to illness, vacation, or industrial dispute Unemployed – workers who were available for work and made an effort to find a job during the previous 4 weeks, or who were available for work and waiting to be recalled from a layoff within 26 weeks, or reporting to a new job within 4 weeks

5. Unemployment in Canada Labour Force = Employed +Unemployed Not in labor force = those who did not have a job and did not actively search for employment (ie: students, early retired, etc) It is important to realize there are THREE important categories.

6. Unemployment in Canada Labour force participation rate – labour force as a percentage of working age population Employment rate – employment as a percentage of working age population Unemployment rate – unemployment as a percentage OF LABOR FORCE -Note that discouraged workers are not considered to be in the labor force

7. Unemployment in Canada

8. Unemployment depends on:  People who lose their jobs and look for a new one  People who find jobs  Unemployed who drop out of labor force (discouraged workers, students, homemakers)  People who enter labour force and look for work

9. 1976-1991 Monthly Labor Force Flows, in 1000’s.

10. “TRUE” UNEMPLOYMENT?  Should discouraged workers be considered? Discouraged Workers – individuals who have stopped looking for a job because they think that the probability of finding a job is low  Are some unemployed actually looking for work?  How do we take workers who want more hours into account?(partially unemployed)  There are even difficulties in definition

11. History - Labour Market Trends

13. Labour Market Trends  Labour participation and employment rate has increased, due to dramatic increase in participation rate of married females  These rates have fluctuated with the economy and the unemployment rate

14. Unemployment Trends -Canadian unemployment has increased since the 1950’s (4.2%) -Unemployment has been decreasing since 1995 -Note the US-Can gap

15. Provincial Unemployment -Duration of unemployment can be as significant as unemployment rate

16. Demographic Unemployment

17. Country Unemployment -While Canada`s unemployment rate WAS (2009) comparable to Europe, length of unemployment was shorter -This helps workers maintain skills and self- esteem

18. Theory - Why Employment Insurance? Two key reasons lie behind government provision of employment insurance: 1)Market Failure a)Adverse selection b)Moral hazard c)Economic cycles 2)Income Redistribution

19. 1a) Adverse Selection  Some people have higher unemployment and therefore higher demand for employment insurance  ie: Young males without high school  This results in high premiums…  Which results in unappealing insurance for low risk individuals…  Which raises premiums even higher

20. 1b) Moral Hazard  Employers can fire their workers, deciding whether they use employment insurance  Unemployed can lengthen their unemployment time, affecting the amount of EI they receive  ie: not actively looking for a new job  ie: rejecting a lower income job or job in a new area  Insurance company can`t detect this, therefore has to charge higher premiums

21. 1c) Econ. Cycles  During a recession, employment insurance claims rise  During an expansion, employment insurance claims fall  Risk pooling can`t allow a private insurance company to survive econ cycles.

22. Government and Market Failure  Adverse Selection – public insurance premiums are mandatory and based on average expected loss  Benefits high risk and penalizes low risk  Moral Hazard – unavoidable, but fought through not covering initial unemployment and only covering a FRACTION of earnings  Econ Cycles – The government can better save and borrow to survive cycles

23. 2) EI and Income Redistribution  EI naturally redistributes wealth from those who don’t suffer employment loss to those who do  Since some people have claims more often and longer claims, there is even more redistribution  IS Employment Insurance good as an income redistribution program?  There are those who agree…(next slide)  There are those who disagree…(2 slides hence)

24. EI and Income Redistribution YES  Employment Insurance supplements (therefore saves on) social assistance  People receiving EI may need less welfare  Some argue that Employment Insurance has less of a work disincentive than typical welfare  There is no implicit tax rate on earnings  EI requires a certain level of work, and therefore is similar to “workfare” (Osberg, 1995)  EI helps those who normally have employment while social assistance helps those who have limited ability to be self-supporting

25. EI and Income Redistribution NO  Employment Insurance does a poor job of redistributing income to the poor  People in equal positions are not treated equally (horizontal equity)  Tax burdens are not distributed fairly across people with different abilities to pay (vertical equity)  Employment Insurance causes major labour market distortions (firms and workers)  Because its not typical insurance

26. EI History – 1930’s  1933 – 25% unemployment, 15% “on relief”  “On relief” largely covered by provincial and municipal governments  1935 social insurance program ruled ultra vires; outside the federal government’s jurisdiction  1867 Constitution Act amended (by federal and provincial governments) to allow for federal unemployment insurance

27. EI History –1940’s and 1950’s  1940 Unemployment Insurance Act  Covered jobs with MODERATE risk of unemployment (not high risk – agriculture, forestry, fishing - or low risk – police, army, government jobs)  42% of labour force  50% of wage benefits, plus 15% if married  lasting for 1/5 of days worked in last 5 years, minus 1/3 of days already claimed in last 3 years  1950’s – UI extended to seasonal workers and “self-employed” fishermen  Important move from original EI goals

28. EI History –1971 Reforms  1971 Unemployment Insurance Act (Bill C-229)  Covered 93% of labor force (excluding self- employed)  Minimum eligibility – 8 weeks of work  Benefit 66% of wage, 75% with dependents  Had a maximum insurable earnings level  Sickness and maternity benefits increased  Duration linked to weeks worked in qualifying period  Increased when national unemployment exceeded 4%  Increased when regional unemployment exceeded national by 1-3% (regional extended benefits)

29. EI History –1971 Reform Impact  Unemployment was constant between 1971 (6.4%) and 1972 (6.3%), yet:  People covered: 5.4 million to 7.8 million  Weeks of benefits: 22.6 million to 30.5 million  Average weekly payment: $40.28 to $61.79  Expenditure skyrocketted:  $0.890 billion to $1.87 billion  Expenditure rose from 0.9% of GNP in 1971 to 1.9% in 1975

30. EI History –1975 Reforms  Those who quit or were fired from misconduct couldn’t claim for 6 weeks (up from 3)  Age limit reduced to 65 years (from 70)  75% dependent coverage eliminated (all 66%)  Increased benefits became linked to an 8 year moving average, instead of 4% trigger

31. EI History –1977 Reforms  New entrants, re-entrants to labor force and people with repeated claims needed more weeks of employment to qualify  Exemptions for repeat claimants in high- unemployment regions  Benefits reduced to 60% of wage (from 66%)  High income earners clawed back at 30% in net income was 1.5 times maximum insurable earnings

32. EI History –1980’s  Unemployment went from 7.6% (1981) to 11.9% (1983)  Benefits rose from $4.76 billion to $10.1 billion  Macdonald Royal Commission on the Economic Union and Development Prospects for Canada (1985) concluded:  UI increased unemployment rates since 1971  Income redistribution should be replaced by a NIT The commission was opposed by Altantic Canada and labor movement and was never adopted

33. EI History –1980’s  1989 Bill C-21 did some changes:  UI funds could be used for training, relocation assistance, and other employment measures  This was meant to fight long-term unemployment  Repeat users no longer had different qualification provisions  UI became entirely funded by employer and employee contributions (no general fund government funding) (as of 1991-1992)

34. EI History –1990’s  Unemployment rose to 11.3%, causing an UI deficit  Government increased employee and employer contributions  This may have lead to more lay-offs  1993 benefits reduced to 57% (from 60%)  Those who quit without just cause became ineligible for UI benefits

35. EI History –1990’s  1994 – UI eligibility in high unemployment regions increased to 12 weeks (from 10)  20 weeks was required in other regions  Benefits could last from 17 to 50 weeks depending on weeks worked and regional unemployment  Benefit reduced to 55% (from 57%)  But raised to 60% for low-income recipients with dependents  Employee contributions increased again

36. EI History –1996 Reforms  1996 Employment Insurance Act (Bill C-12) made major changes in: 1)Eligibility 2)EI Benefits 3)Duration of Benefits 4)Intensity Rule 5)Financing

37. 1) Eligibility  1996 Employment Insurance Act eligibility:  Eligibility based on HOURS of last 52 weeks  420-700, depending on unemployment rate  910 hours for new entrants to labor force and those entering after 2 years  600 hours for sickness, maternity, or parental benefits  Fishing benefits depend on earnings in a fishing season ($2500 to $4200 depending on regional unemployment)  This change took part time work and seasonal work into account much better

38. 2) EI Benefits  55% of insurable earnings, to a maximum of $39,000 (reduced from $42,380)  This held constant until 2006  Maximum Insurable Earnings (MIE) $44,200 in 2011  Low-income claimants with children can get a Family Supplement to increase their benefits to 80% (family income less than $25,921)  5.9% of EI claimants received this supplement  Incomes exceeding $48,750 repay 30% of benefits

39. 3) Duration of Benefits  2 week waiting period  50 maximum weeks (reduced to 45 weeks recently)  15 weeks maternity or sickness benefits  10 week parental benefits (increased to 35 weeks in 2000)  Temporary extensions put in place in 2009

40. 4) Intensity Rule  Benefit rate was reduced by 1% (maximum 5%) for every 20 weeks of regular or fishing benefits  Intended to discourage repeated EI use  Eliminated in 2000

41. 5) Financing  2010 Contribution rates are $1.73 for employees and $2.42 for employers for every $100 insurable earnings  MIE $43,200  Employer rate is 1.4 times employee rate  Maximum $730 for an employee and $1,024 for an employer per year

42. EI Today  Insurance:  Premium financing  Payouts when unemployed  Redistribution:  Benefit clawbacks for high incomes  Variable entrance requirements  Family Supplement  Self-Employed fishermen benefits

43. Theory - Labour Market Effects of EI  Employees and employers can influence EI claims (Moral Hazard)  Studies on the relationship between EI and Unemployment have been inconclusive (Corak 1994)  EI has so many factors, it is hard to gauge its ``generosity``  Many other factors also affect the labor market (oil prices, interest rates, recession, etc)

44. Labour Market Effects of EI  The labour market effects of the Canadian Employment Insurance System can be divided into: 1)Direct Effects – effects on labor market dynamics (ie: employment flow chart, slide 9) a) layoffs b) quits c) duration of employment d) labour force participation)

45. Labour Market Effects of EI 2) Systemic Effects - changes to the economic environment a) industrial mix b) labour mobility c) education 3) Macroeconomic Effects (automatic stabilizing effects)

46. 1) Direct Effects  Layoffs and hiring are caused by: 1)Seasonal variations in demand (not insurable, as they are highly predictable) 2)Business cycle fluctuations in demand (main focus of EI) 3)Long term changes in the economy (requires retraining)

47. 1a) Layoffs  From 1983 to 1999,  Permanent layoffs occurred in 5.7% (1999) to 7.7% (1983) of jobs  Temporary layoffs occurred in 7.3% (1989) to 9.7% (1992) of jobs  Additional workers quit  EI can distort a firm`s layoff decision:

48. 1a) Layoffs  When a firm needs to cut costs, including labour, it can reduce hours or lay off  With EI, laying off (which has EI support) is more attractive than reducing hours (which has no EI support)  Therefore, typical EI encourages layoffs  EI Work-Sharing Programs (started in 1982) allow reduced hours and EI to discourage layoffs

49. 1a) Layoffs  Some firms may design job length according to minimum EI work requirements  Green and Riddell (1995) found an increase in EI requirements from 10 to 14 weeks of work in high unemployment regions in 1990: 1) REDUCED unemployment and 2) increased average length of employment

50. 1b) Quits  Prior to 1993, workers who quit got UI in Canada but not the states, resulting in:  Equal job quitting in Canada and the US  20.6 weeks average unemployment in Canada  11.2 weeks average unemployment in US  (Baker et al, 1996)  If EI applies to quitters, the unemployment rate is increased by longer job searches

51. 1c) Unemployment Duration  Better EI benefits can lengthen the time people spend looking for “the perfect job”  This increases the unemployment rate  Krueger and Meyer (2002) found that increased benefits decreased time spent on job searching BUT  This extra time spent searching can lead to a better fit  This leads to better labour market performance  This leads to lower job turnover  This decreases the unemployment rate

52. 1d) Labor Force Participation  All workers pay the same EI premiums, but marginal workers who are often unemployed benefit more  Therefore marginal workers are encouraged to join the labour force by better EI benefits  If the number of jobs is constant, this increases unemployment

53. 1d) Labor Force Participation  Sharis and Kuch (1978) found EI increased the labor force participation rate, especially among married females  Green and Riddel (2010) found that eliminating EI from 65-75 years decreased 65-75 labor force participation

54. Systemic Effects– 2a) Industrial Mix  EI Premiums vary with wage  This relationship doesn’t vary among industries  Premiums are NOT based on expected EI benefits or layoff likelihood  Some industries get more EI than they pay in  EI therefore subsidizes seasonal and volatile work by taxing stable employment  The following slide shows a ratio of EI Benefits to EI premiums paid  Greater than 1 means it benefits more than it pays

55. Benefit-Tax Ratios 2007 >1 More Benefits than Premiums

56. 2b) Labor Mobility  EI provides greater support to industries and provinces with higher unemployment rates  EI gives Unemployed workers the support to move to a lower-unemployment area and find a job, increasing labor mobility  BUT  EI also DECREASES the income gain from moving, decreasing labor mobility  Studies are inconclusive, plus 70% of people change provinces for non-work reasons

57. Benefit-Tax Ratios 2007 >1 More Benefits than Premiums

58. 2c) Education, Training and Occupation Choices  If EI is generous, there is a greater opportunity cost to stay in school instead of entering the workforce (especially in seasonal industries)  Many young people in rural high-unemployment areas (Newfoundland) may chose a “pogey”/Employment Insurance lifestyle over education (May and Hollett 1995)  Yet Riddell and Song (2011) find that education significant improves re-employment success (which is eventually required for more EI)

59. 3) Macroeconomic Effects – Automatic Stabilization Effects  If EI benefits paid out increase and total premiums decrease in a recession AND  EI premium incomes increase and benefits paid out decrease during a boomTHEN  EI acts as an automatic economy stabilizer  This does seem to occur as EI surpluses tend to occur in booms and EI deficits in a recession:  EI can reduce employment decline by 10% to 13%  Starting in 2011, the Canada Employment Insurance Financing Board will handle all surpluses and deficits (they won’t go into general funds)

60. EI Revenue Minus Expenditure

61. Theory - Distributional Effects of Employment Insurance  Like many government programs, EI can have a variety of distributional effects, which can be divided into: 1)Distribution of Benefits 2)Burden of EI Financing 3)Regional Redistribution 4)Experience-Rated Premiums 5)Coverage

62. 1) Distribution of Benefits  For the bottom 50% of society, EI benefits exceed premiums by $5 Billion in 2002  The lowest 10% of incomes received 22.6% of EI payments  High income EI clawbacks and supplementary benefits for low income families increase this redistributive effect

63. 1) Distribution of Benefits  Although EI has redistribution EFFECTS, it is a poor redistributive TOOL because: a)EI doesn’t help low or zero income individuals who aren’t in the market (disabilities, age, single parents) or have too few hours b)EI still goes to some higher income families (despite clawback), and can be higher, as it is a % of income

64. 1) Distribution of Benefits c) Horizontal inequities (unequal treatment of equals)  2 identical people in different regions could get different benefits  Self-employed fishermen in Nova Scotia get benefits but self-employed farmers in Saskatchewan don’t  Some argue EI should be more INSURANCE- based  But it may be impossible to remove its redistributed nature  This nature should always be kept in mind

65. 2) Burden of EI Financing  Typically, workers directly pay their EI premiums directly  If the labor market is competitive, employers will reduce wages to help pay for employer premiums  Therefore workers indirectly pay for a portion of employer premiums  Exceptions: 1)Low income workers can’t have a lower wage than minimum wage 2)Strong unions may keep wages high

66. 2) Burden of EI Financing  Empirically most of the employer payroll tax is shifted to workers (Dahlby 1993)  Payroll taxes are PROGRESSIVE (increases as income increases) in low-income  As more income comes from working and less from welfare)  Payroll taxes are REGRESSIVE (decreases as income increases) in high-income  As people exceed the insurable amounts  EI redistributes income from middle income families to lower-middle income families

67. 3) Regional Redistribution  EI tends to redistribute income from West to East (Quebec and Atlantic)  EI also therefore redistributes income to primary industries (agriculture, forestry, fishing, and trapping) and construction from other industries (seasonal from non-seasonal)  EI violates horizontal equity (equal treatment of equals), since two identical people in different unemployment regions have different minimum work requirements

68. 4) Experience-Rated Premiums  In the US, employers who lay off frequently have higher premiums (similar to auto insurance and high-risk drivers)  In Canada, this would mean  higher premiums in industries such as construction, therefore lower wages  Lower premiums other industries, therefore higher wages BUT  Some low wage jobs have high layoff rates

69. 4) Experience-Rated Premiums  Experience-rated premiums tend to DECREASE unemployment, as firms have a penalty for layoffs  High layoff industries would contract as low layoff industries would increase  Unemployment would increase short term as workers move from high to low layoff industries  Quebec and Atlantic Canada have many high layoff industries, and would greatly suffer

70. 5) Coverage (2005 Table)  EI covered 43.4% of unemployed  Gov. claims EI covers 80% of target; it is not meant to cover some categories (above)

71. Employment Insurance Conclusion  EI has Insurance and Income Redistribution characteristics (based on loss and need)  Insurance Characteristics:  Only contributors are covered  Higher income have higher loses therefore higher benefits  Income Redistribution Characteristics  Low-income benefit enhanced through Family supplement  High-income benefits are clawed back

72. Employment Insurance Conclusion  Problem of Insurance and Income Redistribution  Balancing two goals may prevent doing either goal well  Perhaps there should be 2 separate programs?  But even 2 separate programs would interact  EI reforms (such as hour-based eligibility) have been improvements, but issues and tensions remain even after over 25 years

73. Chapter 11 Conclusion  Unemployment has increased since 1950, and stated decreasing in 1995, with fluctuations  Unemployment insurance has been essential, but some fear it increases unemployment  EI is a government program due to insurance failure due to market failure and adverse selection  In 1996, EI eligibility changed to hour-based  Tweeks and changes to the program continue to this day