Canada needs an employment insurance system for the 21st century

The pandemic has exposed flaws in several aspects of government in Canada including our employment insurance system. Indeed, in the October throne speech, the Trudeau government said the country needs an EI system for the “21st century.”

The EI system has many shortcomings but three in particular stand out.

First, while EI is federally administered, eligibility and the duration of benefits vary by region. Unemployed workers in high unemployment regions receive benefits for longer periods of time and have easier access to EI than Canadians living in lower unemployment regions, even when employed in similar occupations. As a result, Canadians in some regions must work more hours to qualify for the same benefits as Canadians in other regions.

Second, the system creates disincentives to work, which result in relatively high unemployment rates, particularly in Atlantic Canada. For example, EI sustains seasonal unemployment, which results in reduced investment and productivity growth as companies have ongoing access to relatively low-cost pools of temporary workers, particularly in Atlantic Canada.

A third shortcoming, which has become especially evident during COVID, is the exclusion of self-employed and “gig” workers from EI. Indeed, the Trudeau government had to scramble to construct programs such as the Canada Emergency Response Benefit (CERB) and the Canada Recovery Benefit (CRB) once it realized how many unemployed Canadians were not currently covered by EI.

In response to the pandemic, the Trudeau government also made a number of temporary changes to EI, increasing the generosity of benefits and establishing a minimum unemployment rate that allowed more Canadians to access benefits. However, these changes fall well short of needed reforms.

To improve efficiency and fairness, the federal government must modernize the system. A new Fraser Institute study suggests shifting EI towards an experience-rated system where premiums for employers and employees are calibrated to more closely reflect their historical claims for EI benefits. This change would reduce unemployment and shorten the average duration of unemployment by rewarding workers and employers for sustained periods of continued employment. Additionally, the government should remove “special benefits” (i.e. parental leave) from the EI system and finance those benefits from general tax revenues.

For a more substantial overhaul of the EI system, Ottawa should consider unemployment insurance savings accounts (UISAs), where employers and employees make payroll tax contributions into mandatory personal savings accounts. The contributions remain the personal property of the account holder (employee) and would be invested in diversified portfolios similar to a Tax-Free Savings Account (TFSA).

Workers would be able to withdraw from the account when unemployed and retain any remaining balance at retirement for their personal use. In the case of insufficient balances, a parallel program (funded by general tax revenues) could supplement payments from “underfunded” accounts. UISAs would provide high-powered incentives for workers to find new jobs relatively quickly and to minimize unemployment spells, to build ever-larger balances in their accounts over time. It would also be an efficient vehicle to cover self-employed individuals and would eliminate inequities of the current system.

While there are complicated implementation issues that must be resolved before introducing UISAs, this system has been successful in countries such as Singapore and Chile. Indeed, UISAs could comprise a 21st century employment insurance system for Canada.