Download - 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