A more generous EI program will increase unemployment permanently

Over the summer, the newly minted Employment Insurance Working Group, consisting of three members selected by Canada’s Conservative government and three by the Opposition Liberals, will examine various options to reform the employment insurance program including the proposal by Michael Ignatieff’s Liberals to significantly shorten the qualification period for eligibility.

While proposals like that of the Liberals are well intended, they are ultimately misguided. Previous changes to Canada’s EI program have shown that making the program more generous will lead to a permanent increase in unemployment rates and longer spells of unemployment. In addition, making it easier to claim benefits will require even larger federal deficits that will saddle Canadians with higher taxes in the future to repay what the government borrows. While the employment insurance system needs reform, dramatically reducing qualification period is not the solution.

Currently, most Canadians need to work between 420 and 700 hours in the past year to qualify for employment insurance benefits. The precise number of hours depends on the unemployment rate in the region where the worker resides – workers in high unemployment areas (13 per cent or greater) are at the low end of the range while workers in low unemployment regions (6% or less) are at the upper end. EI benefits can then be collected for up to a year depending again on the unemployment rate in the region and the amount of “insurable hours” worked over the past year.

Pressure to reduce the qualification period for EI eligibility has resulted largely from the grossly exaggerated claims about the number of unemployed workers that are ineligible for employment insurance. For instance, the Liberal party suggests that, “over 60 per cent of unemployed Canadians… do not qualify for it [employment insurance].”

However, a recent TD Economics report highlighted that approximately 30% of unemployed were ineligible for EI because they did not contribute to the program (i.e. those who are self-employed or unemployed for more than 12 months) and another 16% did not qualify because they left their job for “invalid” reasons (i.e. voluntarily quit). The reality is that about 80 percent of those that are “potentially eligible” receive EI benefits. And the number reaches 90 percent for those who had worked full time previous to becoming unemployed.

That said, Ignatieff’s Liberals continue to push for a dramatically reduced EI qualification period of 360 hours, or nine weeks, regardless of the unemployment rate in the region. Unfortunately, the Liberals do not seem to understand that people actually do respond to incentives. Providing 50 weeks of benefits after 9 weeks of work will encourage some Canadians to collect EI rather than continue to work. In addition, the changes will increase the number of Canadians in the labour for the sole purpose of working just long enough to collect benefits. The end result will be a significant and permanent increase in Canada’s unemployment rate.

To get an idea of the ultimate effects of such a change in employment insurance policy, the Employment Insurance Working Group would do well to consider the results from a recent study on unemployment differences in New Brunswick and the U.S. state of Maine.

Long-Term Effects of Generous Unemployment Insurance: Case Study of New Brunswick and Maine,1940-1991 authored by economics professors Peter Kuhn and Chris Riddell compared employment insurance systems in New Brunswick to that in Maine -- two relatively homogenous jurisdictions, socially and economically.

Prior to 1950, New Brunswick’s unemployment rate was similar and indeed often lower than that in Maine. However, in 1950 Canada’s Employment Insurance program (then called unemployment insurance) introduced seasonal benefits which resulted in New Brunswick’s unemployment rate increasing dramatically relative to that in Maine.

Even more relative to the current proposal, a new EI formula was implemented in 1971 which further increased the generosity of the program and made it possible for workers to qualify for 40 weeks of benefits with just 10 weeks of work. Note that the Liberals want the EI program to provide 50 weeks of benefits for just 9 weeks of work.

After the 1971 changes to EI a very significant and permanent gap opened up between unemployment rates in New Brunswick and Maine. By 1990, 29.5 per cent of males and 29.7 percent of females in New Brunswick collected Employment Insurance benefits compared to just 5.7 per cent of males and 3.3 per cent of females in Maine.

Canadians should not expect different results if the current qualification period for EI is reduced to 360 hours. Let’s hope the Employment Insurance Working Group bins the proposal.