Chapter 11: Employment Insurance

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

Chapter 11: Employment Insurance

Unemployment in CanadaWhy Employment Insurance?History in Employment InsuranceLabour Market Effects of Employment

InsuranceDistribution and Employment Insurance

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

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

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.

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

Unemployment in Canada

Unemployment in Canada

Unemployment depends on:People who lose their jobs and look for a new

onePeople who find jobsUnemployed who drop out of labor force

(discouraged workers, students, homemakers)People who enter labour force and look for

work

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

“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

History - Labour Market Trends

History - Labour Market Trends

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

Unemployment Trends

-Canadian unemployment has increased since the 1950’s (4.2%)

-Unemployment has been decreasing since 1995

-Note the US-Can gap

Provincial Unemployment

-Duration of unemployment can be as significant as unemployment rate

Demographic Unemployment

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

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

1a) Adverse SelectionSome people have higher unemployment and

therefore higher demand for employment insuranceie: Young males without high school

This results in high premiums…Which results in unappealing insurance for low

risk individuals…Which raises premiums even higher

1b) Moral HazardEmployers can fire their workers, deciding

whether they use employment insuranceUnemployed can lengthen their unemployment

time, affecting the amount of EI they receiveie: not actively looking for a new jobie: rejecting a lower income job or job in a new area

Insurance company can`t detect this, therefore has to charge higher premiums

1c) Econ. CyclesDuring a recession, employment insurance

claims riseDuring an expansion, employment insurance

claims fall

Risk pooling can`t allow a private insurance company to survive econ cycles.

Government and Market FailureAdverse Selection – public insurance premiums

are mandatory and based on average expected lossBenefits 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

2) EI and Income RedistributionEI naturally redistributes wealth from those who

don’t suffer employment loss to those who doSince 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)

EI and Income Redistribution YESEmployment Insurance supplements (therefore

saves on) social assistancePeople receiving EI may need less welfare

Some argue that Employment Insurance has less of a work disincentive than typical welfareThere is no implicit tax rate on earningsEI 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

EI and Income Redistribution NOEmployment Insurance does a poor job of

redistributing income to the poorPeople 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

EI History – 1930’s1933 – 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

EI History –1940’s and 1950’s1940 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 marriedlasting 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” fishermenImportant move from original EI goals

EI History –1971 Reforms1971 Unemployment Insurance Act (Bill C-229)

Covered 93% of labor force (excluding self-employed)

Minimum eligibility – 8 weeks of workBenefit 66% of wage, 75% with dependents

Had a maximum insurable earnings levelSickness and maternity benefits increasedDuration 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)

EI History –1971 Reform ImpactUnemployment was constant between 1971

(6.4%) and 1972 (6.3%), yet:People covered: 5.4 million to 7.8 millionWeeks of benefits: 22.6 million to 30.5 millionAverage weekly payment: $40.28 to $61.79Expenditure skyrocketted:

$0.890 billion to $1.87 billion

Expenditure rose from 0.9% of GNP in 1971 to 1.9% in 1975

EI History –1975 ReformsThose 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

EI History –1977 ReformsNew entrants, re-entrants to labor force and

people with repeated claims needed more weeks of employment to qualifyExemptions 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

EI History –1980’sUnemployment went from 7.6% (1981) to

11.9% (1983)Benefits rose from $4.76 billion to $10.1 billionMacdonald Royal Commission on the

Economic Union and Development Prospects for Canada (1985) concluded:UI increased unemployment rates since 1971Income redistribution should be replaced by a NIT

The commission was opposed by Altantic Canada and labor movement and was never adopted

EI History –1980’s1989 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 unemploymentRepeat users no longer had different qualification

provisionsUI became entirely funded by employer and

employee contributions (no general fund government funding) (as of 1991-1992)

EI History –1990’sUnemployment rose to 11.3%, causing an UI

deficitGovernment increased employee and employer

contributionsThis 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

EI History –1990’s1994 – 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

EI History –1996 Reforms1996 Employment Insurance Act (Bill C-12)

made major changes in:

1)Eligibility

2)EI Benefits

3)Duration of Benefits

4)Intensity Rule

5)Financing

1) Eligibility1996 Employment Insurance Act eligibility:

Eligibility based on HOURS of last 52 weeks420-700, depending on unemployment rate910 hours for new entrants to labor force and

those entering after 2 years600 hours for sickness, maternity, or parental

benefitsFishing 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

2) EI Benefits55% of insurable earnings, to a maximum of

$39,000 (reduced from $42,380)This held constant until 2006Maximum Insurable Earnings (MIE) $44,200 in

2011Low-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

3) Duration of Benefits2 week waiting period50 maximum weeks (reduced to 45 weeks

recently)15 weeks maternity or sickness benefits10 week parental benefits (increased to 35

weeks in 2000)Temporary extensions put in place in 2009

4) Intensity RuleBenefit rate was reduced by 1% (maximum 5%)

for every 20 weeks of regular or fishing benefitsIntended to discourage repeated EI useEliminated in 2000

5) Financing2010 Contribution rates are $1.73 for

employees and $2.42 for employers for every $100 insurable earnings

MIE $43,200Employer rate is 1.4 times employee rateMaximum $730 for an employee and $1,024 for

an employer per year

EI TodayInsurance:

Premium financingPayouts when unemployed

Redistribution:Benefit clawbacks for high incomesVariable entrance requirementsFamily SupplementSelf-Employed fishermen benefits

Theory - Labour Market Effects of EIEmployees 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)

Labour Market Effects of EIThe 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)

Labour Market Effects of EI2) Systemic Effects - changes to the economic

environment

a) industrial mix

b) labour mobility

c) education

3) Macroeconomic Effects (automatic stabilizing effects)

1) Direct EffectsLayoffs 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)

1a) LayoffsFrom 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:

1a) LayoffsWhen a firm needs to cut costs, including

labour, it can reduce hours or lay offWith EI, laying off (which has EI support) is more

attractive than reducing hours (which has no EI support)

Therefore, typical EI encourages layoffsEI Work-Sharing Programs (started in 1982) allow

reduced hours and EI to discourage layoffs

1a) LayoffsSome 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

1b) QuitsPrior to 1993, workers who quit got UI in

Canada but not the states, resulting in:Equal job quitting in Canada and the US20.6 weeks average unemployment in Canada11.2 weeks average unemployment in US

(Baker et al, 1996)

If EI applies to quitters, the unemployment rate is increased by longer job searches

1c) Unemployment DurationBetter EI benefits can lengthen the time people

spend looking for “the perfect job”This increases the unemployment rateKrueger and Meyer (2002) found that increased

benefits decreased time spent on job searching

BUTThis extra time spent searching can lead to a

better fitThis leads to better labour market performanceThis leads to lower job turnoverThis decreases the unemployment rate

1d) Labor Force ParticipationAll workers pay the same EI premiums, but

marginal workers who are often unemployed benefit moreTherefore marginal workers are encouraged

to join the labour force by better EI benefitsIf the number of jobs is constant, this

increases unemployment

1d) Labor Force ParticipationSharis 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

Systemic Effects–2a) Industrial Mix

EI Premiums vary with wageThis relationship doesn’t vary among industries

Premiums are NOT based on expected EI benefits or layoff likelihoodSome 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 paidGreater than 1 means it benefits more than it pays

Benefit-Tax Ratios 2007

>1 More Benefits than Premiums

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

BUTEI also DECREASES the income gain from

moving, decreasing labor mobilityStudies are inconclusive, plus 70% of people

change provinces for non-work reasons

Benefit-Tax Ratios 2007

>1 More Benefits than Premiums

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)

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 boom THEN

EI acts as an automatic economy stabilizerThis 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)

EI Revenue Minus Expenditure

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

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

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

1) Distribution of Benefitsc) 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

2) Burden of EI FinancingTypically, workers directly pay their EI

premiums directlyIf the labor market is competitive, employers

will reduce wages to help pay for employer premiumsTherefore workers indirectly pay for a portion of

employer premiumsExceptions:

1)Low income workers can’t have a lower wage than minimum wage

2)Strong unions may keep wages high

2) Burden of EI FinancingEmpirically most of the employer payroll tax is

shifted to workers (Dahlby 1993)Payroll taxes are PROGRESSIVE (increases

as income increases) in low-incomeAs more income comes from working and less from

welfare)

Payroll taxes are REGRESSIVE (decreases as income increases) in high-incomeAs people exceed the insurable amounts

EI redistributes income from middle income families to lower-middle income families

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

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 wagesLower premiums other industries, therefore higher

wages

BUTSome low wage jobs have high layoff rates

4) Experience-Rated Premiums

Experience-rated premiums tend to DECREASE unemployment, as firms have a penalty for layoffsHigh 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

5) Coverage (2005 Table)

EI covered 43.4% of unemployedGov. claims EI covers 80% of target; it is not meant to

cover some categories (above)

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 CharacteristicsLow-income benefit enhanced through Family

supplementHigh-income benefits are clawed back

Employment Insurance Conclusion

Problem of Insurance and Income RedistributionBalancing two goals may prevent doing either goal

wellPerhaps 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

Chapter 11 ConclusionUnemployment 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-basedTweeks and changes to the program

continue to this day