EI lessons from South of the border

John Williamson, National Post – June 12, 2009

If Canada's Employment Insurance (EI) program is made more generous -- as

opposition parties in Ottawa are demanding-- the result will be a permanent
increase in the unemployment rate. There's no two ways about it. The rejoinder to
any politician, columnist or economist that scoffs at the suggestion that an
economy can be derailed by easier social assistance is Atlantic Canada.

Federal government changes in the 1970s to EI made leisure more attractive by

paying richer benefits in areas of high unemployment. The result was predictable:
Some people decided collecting pogey was preferable to extra work. It was a
rational response to lousy public policy. The result is that the Atlantic region has
suffered from two conflicting problems at the same time -- high unemployment
and a labour shortage.

Implementing these looser EI rules across Canada would have the same damaging
result. It isn't a question of a unique east-coast culture that favours idleness. We
should not forget that in the mid-1990s, an astounding one in nine people in
Ontario were on welfare as a result of generous payments.

EI is a byzantine system with different rules for workers. In parts of the country
with relatively low unemployment, 6% or less, it can take about 18 weeks (700
hours) of work to qualify for assistance. In places where joblessness is over 13%
benefits can flow after working as little as 10.5 weeks (420 hours). All said,
Canada has 58 different EI zones.

Opposition leader Michael Ignatieff is calling on the governing Conservatives to

dramatically reduce the EI qualification period. But the Liberals think even the
current minimum 420 hours of work is already too punitive. Instead, they are
proposing a mere 360 hours of work to qualify. As economist Jack Mintz has
written on these pages, "Under [Mr. Ignatieff 's] proposal, someone could virtually
work each summer (about 45 days) to claim benefits for the rest of the year." The
result of such generosity would be an increase in the number of people working
less.

Consider New Brunswick and the U. S. state of Maine. These two neighbouring
jurisdictions have much in common. Both are located in the eastern periphery of
the continental market, they each rely on a large resource sector and they have
below-average incomes. Where they differ is with jobless benefits and long-term
unemployment.

According to a report published by the Fraser Institute in 2006, sourced from a

National Bureau of Economic Research paper, Canada's more generous benefits
had a "dramatic impact" on the use of EI and the province's labour market. People
in N. B. claimed more unemployment and worked less than workers in Maine. The
combination of seasonal benefits and larger payments caused a large gap to
emerge in the Maine-N. B. unemployment rates in the mid-1970s.

The report, entitled "The Long-Term Effects of Generous Income Support Program:
Unemployment Insurance in New Brunswick and Maine, 1940-1991," found only
5.7% of male workers and 3.3% of female workers in Maine collected benefits in
1990. Cross the northern border into Canada and 29.5% of male workers and
29.7% of female workers were on the dole. The authors estimated more liberal
benefits in N. B. accounted for two thirds of this difference. They also found that
since 1982, the joblessness rate in N. B. has consistently been above 12%
whereas the out-of-work rate in Maine has routinely been below 8%.

The Atlantic provinces can afford such a rich system because workers in the rest
of Canada pay for it. EI payroll taxes paid by central and Western Canadians make
it possible. These workers transfer more than $500-million in benefits annually to
the East Coast. But that's not the worst part. The Atlantic EI scheme retards job
creation by making it more costly for business to hire workers.

Companies that have, in the past, been ready to hire could not find enough
workers willing to trade leisure for regular work. This choice is influenced by
generous EI payments and explains the paradox of both high unemployment and
a labour shortage in the region. As a result, companies invest less in Atlantic
Canada or leave in search of more willing workers in New England or central and
Western Canada. The result is more unemployment and an exodus of young
people to the United States or other parts of the country. It is a vicious circle with
less economic growth, more dependency and declining opportunity.

People assume that higher unemployment rates necessitate more EI. But it is
worth considering to what degree generous EI has caused chronic unemployment.
Indeed, if EI rules were similar across provinces, it would be an incentive for
workers in areas with high unemployment to move to locations with more jobs.

That EI should be reformed is not disputed. But lowering the eligibility rate to 360
or even 420 hours would blow a permanent hole in Ottawa's balance sheet,
damage Canada's labour market and be costly to future job creation.

EI should operate as an insurance program. Frequent users should either pay

higher premiums or receive lower benefits. Similarly, businesses that routinely
abuse the system by "laying off" workers and hiring them back weeks later should
pay more. But a recession is hardly the time to make these changes.

If benefits are inadequate in the current economy, the solution might be to

provide temporary payments outside of EI. Indeed, it is regrettable the
government dedicated a $10.5-billion bailout to subsidize the jobs of autoworkers
instead of making that money available to unemployed Canadians.

The Conservatives' program of massive deficit spending is bad news for taxpayers
because it will mean paying more interest to service the national debt. But
Ottawa's reckless fiscal expansion should not hurt employment growth prospects
in the middle and long term, provided government expenditures are curtailed and
taxes are not increased. The same cannot be said about a more generous EI
system. It would be detrimental to labour market growth. Mr. Ignatieff proposal is
ill-conceived and the government should ignore him.