January 2001
Softening Employment Insurance Rules: A Step Backwards
In the recent federal election, much of the electoral gain for the governing Liberals took place in Atlantic Canada (8 of the total 17-seat increase). We suggest that much of the Liberal success stems from the recent federal announcement to re-liberalize Employment Insurance (EI). On September 20, 2000 the then Human Resources Minister Jane Stewart announced several forthcoming changes to the program: eliminating the intensity rule, modifying the clawback provisions, and liberalizing maternity benefits.
In a recent AIMS study (Audas and Murrell, 2000), we argue that the recently announced changes are misguided. They soften the modest 1996 reforms that moved many of the seasonally-unemployed off of EI. Especially for young people, the 1996 reforms have led to some substantial changes in the number of hours worked, participation in higher education, and occupational choice.
The 1996 EI Reforms
Before the 1996 EI reforms, the MacDonald Commission, the Forget Commission, and various C.D. Howe studies called for broad-based reform of the then unemployment insurance (UI) program. Faced with fighting a high national deficit—and aware of the widespread anti-UI criticisms—the federal government on October 5, 1994, tabled an important white paper, Jobs and Growth: Improving Social Security in Canada. Following rancorous debate—some within the Liberal caucus and some from union-led street demonstrations—the federal government passed into law a renamed Employment Insurance system that took effect on July 1, 1996.
A summary of the EI reforms follows (see Lin, 1998):
- The "intensity rule": For repeat users, the benefit rate (the ratio of benefits collected as a percentage of prior earnings) is reduced by one percentage point for every 20 weeks of benefits in the past five years, up to five percentage points;
- The "clawback rule": benefits are clawed back through the income tax system, over a $48,750 threshold for infrequent users, and above a $39,000 threshold for frequent users. The clawback rate could go as high as 100 percent for high-income recipients;
- "Reduction in benefits": benefits have been reduced, given a reduction in maximum insurable earnings (to $750 a week) and in the maximum duration benefits (to 45 weeks);
- "Tougher new entrance requirements." For new entrants and re-entrants to the labour force, 910 hours of work are now needed in the previous year for a person to qualify for EI. For other workers with prior attachment to the labour force, 420 to 700 hours at a minimum are needed;
- "The divisor rule": over the last 26-week period preceding the date of the claim, the "average total earnings" are calculated using a divisor rule. The rule is put in place to encourage workers to work more than the minimum number of weeks allowed;
- "Allowable earnings while on claim": claimants can now earn $50 a week or 25 percent of previous earnings, whichever is higher;
- "Family supplement": low-income families with children now receive additional EI benefits;
- Fishermen would receive EI based on the net value of their landed catch (total catch minus 25 percent) with no minimum period of time to qualify; and finally
- The institution and expansion of HRDC "active programs": targeted wage subsidies, targeted wage supplements, skills development, job-creation programs and the like.
Note that the first five changes represent cuts to EI benefits; the latter four changes represent increased income flows to claimants or people on HRDC-created jobs.
Policy analysis
Our AIMS report essentially updates statistics first presented in a study by Doug May and Alton Hollett, A Rock and a Hard Place: Atlantic Canada and the UI Trap. That study, using a variety of statistics from the early 1970s to 1992, showed evidence that UI dollars were becoming an ever-increasing facet of everyday life in Atlantic Canada. As part of the increasing UI transfer dependence, an alarming number of workers were remaining in seasonal, high-unemployment occupations. Moreover, young people put off (or avoided altogether) higher education investment. The ease of obtaining UI payments, consequently, led Atlantic Canadians away from needed labour market adjustment.
Our study investigated—using labour market statistics comparing pre-1996 years to post-1996 years—whether or not there were any important changes to worker behaviour in Atlantic Canada. We followed the standard policy analysis approach, looking at equity and economic efficiency. We summarize both in turn.
As to economic equity, we found more evidence supporting the findings originally discovered by May and Hollett. We, like they, find that the proportion of high-income Atlantic Canadians receiving EI to be quite large, more than twice the national average. In addition, young people receiving EI have higher incomes than those not receiving EI. But the 1996 "clawback" rules meant that high-income recipients would keep less of EI received.
As for labour market efficiency, since 1992 there has been a dramatic fall in the number of workers receiving employment insurance. Whereas some of the decline can be attributed to the rather strong recovery since the 1991/92 recession, it is clear that much of the decline did result from the 1996 EI changes. In Atlantic Canada, the ratio of EI recipients to the number of employed has fallen to pre-1975 levels. Comparing this ratio to that for Canada as a whole, there has been a noticeable decline in the (positive) difference since 1992.
In a comparison of one pre-reform year (1987) to another post reform year (1997), micro-data from the Survey of Consumer Finances reveals that:
- the greatest increase in the length of time worked has been in rural Atlantic Canada, where young people worked almost four weeks longer in 1997 than 1987;
- individuals from all family types, especially in Atlantic Canada, were much more likely to participate in education in 1997 as compared to 1987;
- young Canadians have substantially increased their level of education participation in the past decade. In Atlantic Canada, the urban young's participation rate in education went from 20.9 percent to 32.7 percent, while that for rural young people went from 16.1 percent to 24.5 percent, rates that compare favourably with Canada as a whole; and
- young Atlantic Canadians are increasingly choosing occupations that have stronger futures, like management, natural sciences and sales, over seasonal work like construction, farming, and forestry.
Conclusions
On balance, the 1996 EI reforms have helped Atlantic Canada. But these findings do not mean that further reforms are not needed. The well-publicized HRDC scandals suggest the need for drastic overhaul of the "active" systems within the department. The EI provisions within fisheries are far too generous—and in fact have lured even more individuals, young and old, into this inefficient sector. If anything, an argument can be made that the EI provisions are still too lax.
But if and when the Liberal proposals are enacted into law, the general direction will be to move EI back towards pre-1996 policy. All of the changes increasing EI benefits will remain in place, but some of the restrictive measures will be abolished or reduced. Such changes will decrease labour market adjustment in Atlantic Canada.
References
Rick Audas and David Murrell (2000). Beyond a Hard Place: The Effects of Employment Insurance Reform on Atlantic Canada‘s Economic Dependency. The Atlantic Institute for Market Studies.
Lin (1998). Employment Insurance in Canada: Recent Trends and Policy Changes. Statistics Canada, Research Paper Series, Analytical Studies Branch, no. 125.
Doug May and Alton Hollett (1995). A Rock and a Hard Place: Atlantic Canada and the UI Trap. C.D. Howe Institute.
Rick Audas is from the Faculty of Administration and David Murrell is from the Department of Economics, both at the University of New Brunswick. This article is a summary of a study recently published by the Atlantic Institute of Market Studies (AIMS).
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