December 2000 Fraser Forum:
Destructive Power of EI Reintroduced in Atlantic Canada
A real human tragedy may be in the making. The proposed un-reform of employment insurance could devastate young lives and communities across Atlantic Canada and some parts of Quebec.
Billions of dollars, collected from paycheques across Canada, will flood into the region. And a large portion of it will be used for the most perverse purpose possible. It will, in effect, bribe tens of thousands of young people to stop their education or training—or to give up promising career paths—to take on dead-end seasonal work and join the employment insurance (EI) merry-go-round.
The proposed un-reform of EI will eliminate the intensity rule, which decreased payments to repeat users of EI. And it will dramatically reduce clawbacks from EI recipients with incomes in excess of $50,000 a year.
This will take the brake off the EI merry-go-round and start it spinning again. Reforms in 1996 changed the name from unemployment insurance (UI) to EI. More importantly, they made EI less attractive as a life-long career path through the intensity and clawback provisions. The proposed un-reforms reverse that.
Seasonal work is typically well paid. In rural areas, prior to the 1996 reforms, someone bouncing between short stretches of seasonal work and UI would often take home more money in the course of a year than someone who worked year-round, particularly in entry level jobs.
This created a powerful incentive for young people. Why work year-round, even in a job with career potential, when you can earn more simply by taking an eight-month vacation? Why go to school, when the government will pay you to drop out? In this sort of two-step, you hardly need education or skills training for your low-skill seasonal job or to open your government cheque.
This is chapter three of the on-going EI tragedy. The first chapter followed the "regionally-extended" reform to unemployment insurance (UI) in 1971, dramatically increasing the generosity and accessibility of the system in "have-not" regions. This trapped two generations with the perverse incentives discussed above. Then chapter two. The 1996 reforms created real hardship for many families and workers who, when young, had been bribed into the UI stream by government largesse and had never developed the skills needed to hold a year- round, full-time job in the modern economy. These people felt they had been offered a contract by government. They had shaped their lives to collect UI, and they now had no options. They felt betrayed. Anger spread through Atlantic Canada. The federal Liberals lost many seats.
Those already trapped by the system —for which they were not responsible, as it was developed by policy-makers and politicians in far-away Ottawa— should be treated compassionately, but their plight should be reason enough not to trap the next generation. That was the purpose of the 1996 reforms. And the reforms were working, or at least half working. It’s true that those who had already been trapped by the system remained trapped. Few re-entered the permanent work force. All that happened was that thousands of families saw their income drop dramatically.
The reforms also invented a new perversity, one that drew many people into the fishery at a time when the Department of Fisheries at least said it was trying to reduce the number of fishers through a costly program of license buybacks and early retirement. The new rule allowed fishers to collect EI for up to half a year just for catching $2,500 worth of fish. That could often be done in a few days, particularly for lucrative—and overfished—shellfish stocks.
However, the 1996 reforms appeared successful—and dramatically successful—in a most important aspect: avoiding future human tragedy. Young people were no longer streaming out of school to join the EI system. In fact, the number of 18 to 29 year-olds in schools and other educational institutions has increased by about 50 percent.
I am from Atlantic Canada. I grew up when UI was being enriched the first time. I’ve seen how the system works. I’ve seen how it destroys lives. I still have friends from high school who, way back when, decided not to look for real jobs, not to further their education, and not to develop their skills.
They were enchanted by unemployment insurance. Ten weeks of work was all you needed to collect UI for the rest of the year. When you’re young, 42 weeks of partying looks pretty good.
By the time the party stopped, most of their opportunities had passed by. Now these old friends have hair that’s growing grey, if it’s still growing at all. Their step has slowed, and life doesn’t seem like much of a party.
People forget that when UI was regionally extended in 1971, unemployment in Atlantic Canada was just slightly above the national average. Regionally-extended UI swept across the region like an economic plague, levelling economic activity throughout Atlantic Canada.
In many communities, 80 to 90 percent of two-income families were soon collecting UI. It destroyed what had been year round work patterns, even in rural areas. Businesses across Atlantic Canada lost employees. To hire workers, even in communities with sky-high unemployment, businesses had to inflate their pay rates, often beyond what they could afford. They were competing against a rich government with no budget constraint which their increasing taxes were funding.
Within just a couple years of the 1971 UI reforms, Statistics Canada began reporting labour shortages across the region, even as unemployment soared into the double digits. UI was too good to give up. Atlantic Canadians aren’t lazy; theirs was a rational response to an irrational policy. Successful firms couldn’t hire and expand. Businesses failed. Year-round jobs disappeared. Economic activity slowed. Much of the region became an employment wasteland. Whole industries, particularly the fisheries, were structured to cycle people through with just enough weeks of work to qualify for a year of UI.
The tragedy was greatest in rural communities. It hit young people the hardest. The UI cycle may seem like a good idea when you’re in your twenties. But pay rates in real jobs go up over time. People are promoted. They learn new skills. They find new opportunities. The UI/EI-merry-go-round produces no such opportunities. A government-provided income that seems rich when you’re young can seem awfully constraining when you want to raise a family. By then, you’re trapped. The only line of work you know is work that is subsidized by employment insurance.
Your future and your income are out of your hands. Everything depends on government decisions. Whole families become government dependants, forced to vote for whichever party promises the largest increase in their government stipend. Such dependence robs people of their political freedom.
Many economists believe EI’s generosity should be kept low so that young people in Atlantic Canada will go where the opportunities are. That option is probably better than getting stuck in a never-ending rut. But it’s not the whole story.
Ireland, that once famous exporter of people, started generating jobs hand over fist when it put sensible policies in place—particularly tax cuts and labour deals that kept wage growth moderate. That opened profit-making opportunities and led to a surge of investment and job growth.
The same thing can happen in Atlantic Canada. In fact, it was happening in Atlantic Canada before regionally-extended unemployment insurance was introduced in 1971. Both New Brunswick and Nova Scotia had at least one year with unemployment below the national average. PEI’s unemployment rate was typically even lower. Prior to the 1971 UI reforms, the whole region had been growing much faster than the rest of Canada.
The economic activity and the jobs destroyed by UI are gone. It will take a long time for new leaders and businesses to arise and start rebuilding the destruction left in UI’s wake. That’s no reason to start another round of destruction.
Fred McMahon (fredm@fraserinstitute.ca) is Director of the Social Affairs Centre at The Fraser Institute. Formerly with the Atlantic Institute for Market Studies, his most recent book is Retreat from Growth: Atlantic Canada and the Negative Sum Economy.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.