The Effect of Employment Insurance in Canada

The Effect of Employment Insurance in Canada Completed by University of Outline 1. Abstract 2. Introduction a. review of the literature, data and methodology 3. Main issues/findings 4. Conclusion 5. References Abstract The restructuring of the Canadian economy has generated intense pressures on the labor market. The consequences have included higher levels of unemployment, displaced workers with few skills and poor prospects, a growth in long-term unemployment, extensive shaking in the labor market, and a higher general sense of economic insecurity. All of this has led to contradictory pressures on social programs. On one side are demands to preserve existing programs that protect the incomes of displaced workers and their families; on the other side are demands to reform these programs so as to enhance the flexibility of the labor market and the redeployment of labor to expanding areas of production. This paper defines, outlines, and analyzes the Employment Insurance (EI) policies and the whole (EI) system in Canada in order to determine what effects these policies have on the Canadian economy. The paper begins with introduction that contains a brief literature review and methodology of the paper. Next we move on to main issues with EI in Canada, concentrating on the strengths and weaknesses of the EI in Canada. The paper concludes by making a conclusion on the overall effectiveness of the EI policies in Canada and EI’s influence on the Canadian economy. Introduction During the 1970s and 1980s, there were significant impediments in Canada to policies that focused on positive adjustment, especially the relocation and retraining of workers. These policies have long proved problematic from the perspective of Canadian values. First, they constitute an apparent admission of defeat, an acceptance that Canadians cannot prevail or even effectively compete in the industry in question. Second, they appear to compensate workers for the risks of change and are therefore seen as undermining the values of individual self-reliance, planning, and foresight (Christofides 1996, 290-298). Arthur Sweetman in “The Impact of EI on Those Working Less than 15 Hours Per Week” (2000) argues that if pensions have moved consistently in one direction, unemployment insurance has resembled a roller-coaster. The large historical difference between the two systems expanded dramatically during the 1980s, but it began to contract again during the 1990s. The author states that, for instance, in the United States, unemployment insurance is a federal-state program and is delivered by the state governments. The program is financed exclusively through a payroll tax on employers, with employees making no direct contributions. The federal government imposes a payroll tax on employers and then rebates the revenue to the state governments that operate a federally approved program. The state governments impose an additional payroll tax and can borrow from the federal Treasury if their programs are threatened with insolvency during periods of high unemployment. Federal legislation generally determines what employment is covered, but the states determine the qualification periods, as well as the level and duration of the regular state benefit programs. There is also a federal-state program of extended benefits, designed to be triggered on a state-by-state basis during recessions. In comparison, as referred to by Christopher Ferrall in ”Unemployment Insurance Eligibility and the School to Work Transition in Canada and the United States”(1997), the Canadian program enjoys the simplicity of being an exclusively federal program, financed by contributions by employers and employees which were supplemented until 1991 from general federal revenues. The author states that the complexity of the Canadian program is found in the regional differentials that have been built into both the qualification periods and the duration of benefits, providing enriched support in areas of high unemployment. Finally, as revealed by the Canada Employment Insurance Commission, after a major expansion in 1971, the Canadian program provided far greater protection to the unemployed than the program in the United States did. Although benefit levels were not dramatically higher, especially after they were trimmed in 1978, coverage in Canada was broader, work requirements were less restrictive, and benefit periods were longer. According to this official governmental source on EI, maximum benefit periods were normally twenty-six weeks in the United States and fifty-two weeks in Canada. There is also some information on this website proving that in addition, the Canadian program introduced elements, such as maternity and later paternity benefits, that are not covered in the United States. What is more, according to Canada Employment Insurance Commission, with this more liberal program structure, unemployment benefits represented a dramatically larger financial commitment for the public sector in Canada. For example, as recently as 1993 unemployment insurance benefits represented 2.6 per cent of GDP in Canada, but only 0.

5 per cent in the United States, a gap far greater than the difference in unemployment rates (Canada Employment Insurance Commission 2005). Main issues/findings As illustrated by the Canada Employment Insurance Commission, the differences between the two programs grew strongly over the course of the 1980s. While the Canadian program suffered only marginal adjustments during the decade, the Reagan administration had a significant impact on unemployment insurance south of the border. Federal legislation virtually eliminated extended benefits, and it began to charge interest on state borrowing from the federal Treasury, which put pressure on the states to revise their programs. Given the weakness of organized labor in most state capitals, the revisions relied much more on benefit restrictions than on increased payroll taxes. According to Burtless, the result was a serious erosion of unemployment insurance that went “virtually unnoticed in the early 1980s at a time when far smaller proportional cutbacks in public assistance, disability insurance and social security caused loud public outcries” ( Burtless 1991, 41). Whereas approximately 80 per cent of the unemployed received benefits during the recession of the mid-1970s, only 26 per cent of the unemployed were receiving benefits in 1987 (U.S. Committee on Ways and Means 1991, 483). The divergence in the 1980s has given way to some convergence since then. Faced with major increases in spending on unemployment benefits during the recession of the early 1990s, Canadian governments of both Conservative and Liberal persuasion have taken slices from the program. In 1991 the federal government's financial contribution ended, shifting the full cost to employers and employees. In addition, the period of employment required to qualify for benefit was increased in 2000 and 2004, and was planned to rise again in 2006 (Canada Employment Insurance Commission 2006). The maximum length of time for which benefits can be received was reduced in 2000 and was to drop again in 2006. And benefits levels were reduced from 60 to 57 per cent of insurable earnings in 2003 and were cut further for most beneficiaries to 55 per cent in 2004. At the same time, the United States was temporarily repairing some of the damage to its program. In Canada one would expect far less ideological resistance to such policies. Indeed, positive adjustment policies can be understood as a form of social insurance consistent with the risk-adverse individualism that typifies Canadian attitudes. However, to the left in Canada these policies tended to signify defeat, a sell-out to global economic forces and a rejection of nationalism; the preferred alternative often was a strongly protectionist strategy aimed at resisting shifts in comparative advantage. Proposals to transform unemployment insurance into a vehicle of positive adjustment, with benefits linked to retraining and skills development, have failed to gain ideological consensus, largely because they have gone hand in hand with an erosion of the value of insurance entitlements (Christofides 1996, 295-302). By the end of the 1990s, however, interest in positive adjustment measures, whether for training benefits or for mandatory advance notice periods for plant closures, began to attract a new ideological agreement in North America. This emerging consensus -- and apparent convergence between the two countries -- has been premised on a newfound acceptance that continual shifts in comparative advantage and corresponding worker dislocations are inevitable (Ferrall 1997, 12-18). The days of lifelong security in high-paid manufacturing jobs are over, and the emphasis is now on ensuring that the workforce is skilled, adaptable, and mobile. Again, social policy becomes an instrument of industrial policy (Christofides 1996, 295-302). Of course, political consensus does not automatically translate directly into expenditures. In both Canada and the United States, the growing emphasis on positive adjustment has encountered a counterweight in the form of public deficits (Sweetman 2000, 34-39). Overall government expenditures on employment programs, including unemployment insurance, job training, and job creation, represent a considerably higher percentage of GNP in Canada than in the United States: in 1987 the figures were 2.24 per cent as opposed to 0.83 per cent, a disparity much greater than the difference in unemployment rates in the two countries (Sweetman 2000, 34-39). However, the two countries are similar in devoting the lion's share of their expenditures to income maintenance as distinct from employment promotion measures, especially when compared with Sweden, Germany, and a number of other European countries. The predominance of income support is marginally higher in Canada (about 75 per cent) than in the United States (about 66 per cent), again presumably in part because of the higher unemployment rates (Green and Riddell 1992, 23-26). Indeed, training programs underwent significant cuts during the 1990s. Different commentators measure the depth of the cuts differently. Ferrall suggests that in the United States public funding for training and retraining was reduced by 50 per cent during the 1990s (1997, 58).

With respect to Canada, between 1994 and 2000 the federal government drastically reduced its allocations for training and labor market development nationwide, with funding declining by $600 million over this period (Sweetman 2000, 33). The decline in labor market training expenditures in Canada was noted, as a percentage of GNP, from 0.35 per cent in 1996-97 to 0.26 per cent at the end of the decade, but observed a smaller decline in the United States over the same period -- from 0.12 per cent to 0.10 per cent (Ferrall 1997, 41). The more dramatic decrease noted by Ferrall suggests a broader definition of labor market policies, including not only explicit training programs but trade adjustment assistance intended to provide income support during retraining (1997, 52). Whatever the differences in measurement, however, the expenditure decisions clearly did not accord with the rhetoric of positive adjustment. Towards the end of the decade there were some signs of this trend reversing itself in both countries. In Canada, the federal government undertook a new training initiative in 1999, the Actions similar in scope to the 1989 Labor Force Development Strategy. No new public funds were actually allocated to training, but $775 million was taken from the existing budget for unemployment insurance (Green and Riddell 1992, 23-26). In the United States, federal job-training programs were significantly strengthened in 1998-89. Almost $1 billion authorized (but not yet fully appropriated) should be sufficient to retrain and get new jobs for the approximately 1 million American employees who are dislocated each year. While this may be somewhat overoptimistic, human capital development has been a major theme of the Clinton administration. Canada continues to lag far behind the United States in private-sector commitment to training and retraining. In 1997 private-sector training expenditures in Canada totaled about $1.5 billion, whereas comparable U.S. expenditures were around $80 billion (Sweetman 2000, 15-17). This stunning differential may be significantly related to the fact that the U.S. economy is much more dependent on high-technology, high-valued-added industries, where constant training and retraining are essential to the maintenance of comparative advantage. At play, as well, may be the Canadian legacy of looking to government for training and educational services. Unfortunately, the evidence drawn from the experience with trade adjustment assistance in the United States and from various forms of adjustment assistance in Canada suggests that these programs have rarely been successful in facilitating positive adjustment. The main example of an adjustment program directly linked to trade-induced dislocation is the U.S. Trade Adjustment Assistance program (TAA). First implemented with the Kennedy Round GATT agreement in 1962, the program offered both supplemental unemployment insurance benefits and re-employment services to workers displaced by import competition. The results were dismal: although $86 million was provided in supplemental unemployment insurance between 1962 and 1975, a mere 125 workers actually took advantage of the retraining benefits (O'Hara 1983, 406-7). In view of this failure, the program was redesigned and re-enacted under the Trade Act of 1974, with a greater emphasis on positive adjustment benefits. However, an evaluation of the new program by the General Accounting Office found that it too had largely been a failure in facilitating positive adjustment. Two-thirds of the workers who benefited returned to their previous employer after a period of unemployment, and only about 10 per cent participated in retraining or other positive adjustment aspects of the program (O'Hara 1983, 42-3). On the theory that supplemental unemployment benefits actually created a disincentive for workers to adjust or relocate, the program was once again revised in 1980, with a provision that allowed termination of a worker's benefits if he or she refused to participate in a training program or to extend the job search beyond his or her own community (O'Hara 1983, 409). Even this change did not seem to make the adjustment aspect of the program more successful; a 1986 study found that the very existence of supplemental unemployment insurance benefits increased the labor force in import-affected sectors. Summary In 1988 a new positive adjustment program was established in the United States, the Economic Dislocation and Worker Adjustment Assistance program (EDWAA). This program was not limited to trade-displaced workers, and it was designed to function in tandem with the sixty-day required notice period for plant closings or mass layoffs in the Worker Adjustment and Retraining Notification Act. The concept was that of a much more rapid response to worker dislocation than that permitted under the TAA. However, state implementation of the EDWAA has been uneven, and often workers have only been certified as eligible for assistance three to six months after becoming unemployed (Ferrall 1997, 35).

As well, training under the EDWAA lasts only from twelve to sixteen weeks, hardly adequate for the acquisition of many of the skills required for re-employability in higher-value-added occupations. Why did targeted trade adjustment assistance largely fail to achieve its broader goal of permitting workers to develop the skills required to move to other sectors of the economy? One reason may be that in the sensitive sectors concerned, the U.S. government was less than unequivocally committed to trade liberalization and worker adjustment. In the steel and auto sectors, for instance, workers were being sent a mixed message: on one hand, the availability of adjustment benefits; on the other hand, renewed efforts to protect these industries from new or intensified import competition, through voluntary export restraints and other measures. Another reason, more directly linked to the consequence of targeting itself, is that the case-by-case determination of whether workers qualified as import-injured resulted in considerable delays in the availability of assistance. Bratt (1982, 819) has argued that the Trade Adjustment Assistance program would have been more effective if the U.S. Department of Labor had predetermined (e.g., by sector, region, etc.) those classes of workers most likely to be affected by imports, thereby permitting rapid distribution of benefits without the need for an individualized plant-by-plant or worker-by-worker inquiry into the causes of displacement. The major initiative of the Mulroney government in the adjustment area was the Canada Jobs Strategy (CJS), which entailed around $1.5 billion in annual expenditures for training and job creation from the mid-1980s onward. The CJS was intended to emphasize private-sector training and job creation. However, critics have seriously questioned whether much of the expenditure has not simply resulted in wage subsidies, without significantly increasing the skill levels of workers or making them more employable in new occupations (Ferrall 1997, 12-18). With respect to training purchased from community colleges and other provincial institutions, the evidence suggests that much of this is for skills that are not in demand or that will not be in demand when the worker completes the training program. In Atlantic Canada, in particular, training benefits have been used primarily as a means of extending income maintenance beyond the limits of unemployment insurance (UI) benefits and not for positive adjustment (Canada Employment Insurance Commission 2006). An internal evaluation of the CJS conducted by Employment and Immigration Canada found that wage subsidies and in-firm training subsidies were often ineffective in enhancing the employability of the beneficiaries; male workers often gained nothing from these subsidies in terms of employability, though the results for female workers were more positive. Moreover, the review concluded that the General Projects option of the CJS was used as a temporary job creation measure in depressed labor markets and minimal training was provided to participants (Canada Employment Insurance Commission 2006). Canada is also marked by uneven economic development, with Atlantic Canada in particular lagging behind other regions. In contrast with the southern United States, however, Atlantic Canada has embraced national social programs and has come to depend heavily on the large interregional transfers implicit in them. The importance of independent commodity producers in the fishing and lumber industries of Atlantic Canada, and the seasonal nature of much employment there, created a large political constituency in favor of expanded federal income transfers. Conclusion Canada welcomed the extension of Unemployment insurance to fishermen in 1957, as well as a major enrichment of the program and the introduction of regionally extended benefits in areas of high unemployment in 1971. These changes transformed UI from a traditional social insurance program into a broad instrument of income supplementation, and its benefits sustain many small communities throughout the region. In contrast to the American South, Atlantic Canada has regarded expansive social programs as a mechanism for protecting traditional occupations and communities from the forces of economic modernization (Bratt 1982, 821). As a result, the region has fought vigorously against successive efforts to retrench the program since the late 1970s. Indeed, the most effective political resistance to cuts in UI has come from politicians in the poorer provinces rather than from leaders of organized labor (Christofides 1996, 290-298). The provincial premiers and MPs from Atlantic Canada have repeatedly fought to protect seasonal workers and to reduce the impact of program changes in their region. The result is that although UI is a federal program, its benefits are increasingly differentiated on a regional basis. By 2004, for example, the generosity of the program was about 40 per cent greater in Newfoundland than the national average. Historically, the primary regional obstacle to the expansion of national social programs in Canada flowed from Quebec, which played a role analogous to that of the American South during the first half of the twentieth century.

French-Canadian nationalists resisted federal social programs as a form of cultural imperialism that threatened to undermine the distinctiveness of their society (Sweetman 2000, 34-39). Like the American South, Quebec was unable to halt the emergence of national social programs, but it slowed the pace and helped to preserve a substantial sphere for provincial discretion. However, this similarity disappeared rapidly after 1960, when a reformist Liberal Party won power at the provincial level and launched a sweeping program of modernization which significantly expanded the role of the provincial government in Quebec life (Green and Riddell 1992, 23-26). Initially, the Canadian trend reflected the introduction of income supplements, such as the Guaranteed Income Supplement (GIS) and the refundable Child Tax Credit (CTC). Since the 1980s, however, the pattern has also reflected the growth of social assistance programs and, more recently, the transformation of universal programs, such as Family Allowances and Old Age Security (OAS), into income-tested benefits. In contrast, the fiscal dominance of Social Security has remained unchallenged in the United States. Despite the development of the Earned Income Tax Credit, which will be discussed more fully below, selective programs generally have declined as a proportion of income security expenditures. Clearly, the two systems have been traveling different pathways for decades. In income security, the prospects for convergence seem more limited, partly because the contrast is already less marked. However, existing areas of convergence may well be accentuated. For example, differences between the two UI systems may continue to narrow, although the tenacity of regional politics in Canada will undoubtedly prevent anything close to full harmonization. The reversal of the trend towards greater divergence in social assistance may also continue, although much depends on the outcome of the battles in Congress over welfare reform. In other income-security programs the prospects are for continued divergence, with Canada maintaining its trend towards a stronger targeting of transfers on low income families and individuals. For example, the 1996 budget of the federal Liberal government pointed to the future with its announcement that the income-tested Seniors Benefit would be implemented in the year 2011. South of the border, the fate of the Bipartisan Commission on Entitlement and Tax Reform suggests that proposals to apply means tests to universal programs such as social security remain politically controversial. Formed to examine the fiscal pressures on entitlement programs, the commission could not agree on recommendations for action, and the modest proposals advanced personally by the senators who chaired the commission were widely criticized In summary, strong divergence in the 1990s has given way to convergence in the 21-st century. Canada has withdrawn significant resources from its program in recent years, especially in the more affluent parts of the country. Nevertheless, it is important to realize that EI has tremendous impact on the Canadian economy because it becomes almost the only way of survival for hundreds in times of economic recessions and massive lay-offs.