If Canada's Employment Insurance program was designed solely to insure workers against the loss of employment, it would look very different.
For one thing, the premiums that employees and employers contribute would go towards paying benefits to people who have lost their jobs. But in 2013/14 - the most recent year for which I can find data - less than half the monies collected in EI premiums went to regular benefits for unemployed workers. The rest went to special benefits such as parental and sickness leave, to fishing benefits, to fund "Part II" benefits (mostly labour market development agreements with the provinces), to cover administrative costs and to run a surplus.
If Employment Insurance worked like insurance, people who were at greater risk of being laid off would pay higher premiums or receive lower benefits. There would be experience rating, so workers or employers who used the EI system repeatedly would see their premiums increased or benefits decreased.
But that's not how it works. As the next picture shows, workers in a handful of industries receive, on average, substantially more than they contribute in benefits from Employment Insurance. But because EI has administrative costs, pays for training, and in some years runs a surplus, workers in most industries have a benefit-to-contribution ratio below one.
I could have drawn this graph twenty years ago, and the overall pattern would have looked much the same. The only major change in recent years is that the expansion of maternity and parental benefits has bumped up the total income benefits/contribution ratios in industries with female-dominated workforces, such as health care and social assistance.
Not only does Canada's Employment Insurance system not experience rate workers, firms or industries, it actually employs a system that is close to reverse experience rating. The number of hours required to qualify for benefits, the duration of benefits, and even the amount of benefits received can depend upon the local employment rate - what the Mowat Centre EI Task Force dubbed the postal code lottery. The impact of these rules - working alongside the presence of special EI benefits for fisheries workers and in combination with the varying industrial mix and economic conditions of different provinces - is an EI system that benefits some provinces, on average, more than others.
Any policy maker whose sole aim was to create a plan to insure workers against job loss would never have come up with our present system.
Which raises the question: why do we have the system we do?
There are some cynical, and not entirely inaccurate answers: Employment Insurance is for winning votes in Atlantic Canada. Employment Insurance is for making depressed regions of the country economically viable; for keeping small communities alive. Employment Insurance is for subsidizing industries that are, for one reason or another, considered to be important to the Canadian economy, like the fisheries. Yet these answers raise the question, Why EI? Why use Employment Insurance for regional subsidies, rather than another scheme, such as equalization?
One way of understanding the structure of our current EI system is through James Buchanan's analysis of the adage "an old tax is a good tax". It is politically easier to maintain a tax that is already in place than introduce a new tax. The figure below shows the evolution of Employment Insurance premiums over time. Canada's Unemployment Insurance program (as it was then known) was radically overhauled in 1971. The new system was immediately hit by the OPEC oil price shock, and costs began to rise. Premiums rose to cover expenses until the early 1990s, when the system was again overhauled and made substantially less generous.
That 1990s reform changed EI from a system that chronically run deficits to one that often ran surpluses. Those surpluses did, eventually, lead to reduced premiums. But they also created fiscal room which could be used to finance new programs like compassionate care and expanded parental leaves, or the labour market development agreements. These programs were not only desirable in and of themselves, they also, by delivering benefits to groups of workers traditionally ill-served by EI, such as employees in the health care industry, bolstered the political base of the EI program.
Yet in the long run this evolution has led the Employment Insurance system away from its core focus of insuring against loss of employment and towards a greater focus on social development-type goals, and leaves us asking - again - what is Employment Insurance for?
Looking at the existing range of programs financed through EI, and how they are structured, it seems that there are four things that Employment Insurance is for at Canada at the present time.
- Income redistribution: EI is for redistributing income to those who are in need
- Social policy: EI is for making it easier for families to cope with sickness and caregiving responsibilities
- Work supports: EI is for making it easier for people to re-enter the labour market after job loss
- Regional and industrial policy: EI is for supporting certain Canadian regions and industries.
Let's take each of these in turn.
Here, EI could do better. The number one item on my wish list is elimination of the regional differences in eligibility for benefits, and for receipt of benefits.
People who are at greater risk of becoming and staying unemployed already benefit more from the existence of EI than other workers because they are more likely to claim EI and - to the extent that it's harder for them to find work - they claim EI for longer. There is no sense in extending their benefits further.
Now it could be argued that people who remain on EI in low unemployment regions are lazy people who are simply not trying, whereas people who remain on EI in high unemployment regions are hard working individuals for whom there is no job available. Yet there are all sorts of factors that make it hard for people to find work after they have lost a job - being older, being a recent immigrant, having low levels of education, having a disability, and so on. What is the sense behind privileging region of residence, and not the many other factors that contribute to the ease by which people can find employment?
Moreover, Canada implements regional differences in eligibility badly. When people are laid off, their eligibility for benefits is based upon the seasonally adjusted unemployment rate over the past three months for which data is available in their region. Someone who is laid off right at the beginning of a recession will be eligible for fewer weeks of benefits, even though she may struggle to be re-employed (although there is some scope for adjustments). By way of contrast, someone who is laid off towards the end of a recession will receive relatively more generous benefits, even though the economy at this point is starting to recover, and job prospects will be better. The illogic of this system becomes starkly apparent when a part of the economy experiences sudden fluctuations in the employment rate.
The proposal in the 2016 Budget to extend the period for which people can claim benefits in 12 regions that have experienced sudden rises in unemployment rates is a flawed attempt to introduce greater rationality into a fundamentally irrational system. It would be better just to get rid of regional differentiation of benefits.
The second item on my wish list is a more creative and flexible approach to determining eligibility for benefits. Part-time workers and students can pay into EI for years, working summers and weekends, yet never accumulate enough hours to be eligible for benefits. It wouldn't be hard to say to potential claimants who lack sufficient hours, "Sorry, you don't qualify for benefits, here's a cheque that reflects all the amounts that you have contributed to Employment Insurance over the past five years." It should be noted, however, that the announcement in the most recent budget to eliminate the tougher eligibility requirements placed on new labour market entrants will go some way towards easing the situation for part-time workers and students.
The third item on my wish list would be some kind of brake on the subsidies EI delivers to the fishing and construction industries. As the table below shows, the hourly wage rate in construction is above the national average; why subsidize the industry further through the EI system?
EI is not jut about benefits for unemployed workers: the parental, compassionate care, sickness and other provisions are key social policy tools.
Yet it is not obvious that EI is the best vehicle for financing programs with broader social goals such as training or compassionate care leave. First, EI premiums are generally thought to be a regressive form of taxation (except to the extent that the employer share falls on the owners of capital), and one might have doubts about the desirability of using regressive taxation to fund general social policy programs. Second, use of EI to fund benefits excludes people who are not in the labour market, and often the self-employed as well.
The self-employed can, in fact, chose to participate in Employment Insurance and claim maternity and parental benefits. But according to the 2015 Employment Insurance Monitoring and Assessment Report, there were just 558 maternity claims among self-employed workers in 2013/14, compared to 169,640 maternity claims among employed women. To put that number into perspective, in 2015 fifteen percent of Canadian workers were self-employed (CANSIM 282-0012). Now it may be that self-employed women are choosing to finance their own parental leaves, rather than opting into EI. However to the extent that low take-up for EI special benefits reflects fewer maternity and parental leaves, and to the extent that maternity and parental leave benefits have positive impacts on children's and mother's well-being, the low participation rates of the self-employed in EI special benefits is a matter of concern.
On my wish list: better access to maternity and parental leaves among the self-employed. A re-examination of the desirability of funding social programs through EI premiums.
There are some telling numbers buried in the Employment Insurance Monitoring and Assessment Report. In 2013/14, over a million people - 1,325,840 to be precise - claimed regular EI benefits. About one quarter of that number, 348,909, received "Part II" benefits - skills development, and so on - while on claim.
These numbers reveal just how disconnected many EI recipients are from the skills development part of the EI program - or indeed human interaction with Service Canada workers. The entire process of claiming EI is now completely electronic. The form to apply must be completed on-line. The bi-weekly reports must be completed on-line. I have someone in my household right now who is claiming EI benefits, and I am truly stunned by the absence of any kind of behavioural nudges, anything that points a claimant in the direction of seeking work.
On my wish list: behavioural nudges integrated into the EI on-line system, for example, links to job sites, productivity software, etc.
That's all for now. It should be pretty obvious that I have serious concerns about using EI as a tool for industrial and regional policy.
I'm talking about EI on March 31st here - https://www.cdhowe.org/essential-public-policy-events/employment-insurance-wish-list-reform.