Employment Insurance: Time to put policy ahead of politics

TheGlobeandMail.com – commentary
Aug. 08 2013.   Grant Bishop

The present Employment Insurance system is a glaring example of politics holding policy hostage. What is an essential component of our income security framework has long been a vehicle for politicians’ electoral self-interest.

This has been to the detriment of both economic efficiency in labour markets and the program’s core insurance aims. Governments – of both Conservative and Liberal stripes – have used the EI piggy-bank to fund regional subsidies, pet projects and general deficit reduction. And, beset by these politics, EI has resisted persistent calls for reform.

The Atlantic premiers have bristledat recently-enacted requirements for workers on EI to accept “suitable employment.” However, this is a constructive change, consistent with the insurance aims of the EI system.

Another flare-up concerns the apparent “bounty hunting” exercise on which the current government has embarked, assigning numerical targets for EI fraud to EI investigators.

The Auditor General recently expressed concerns about almost $300-million in annual EI overpayments, more than $110-million of which owed to fraud and misrepresentation. However, quotas are a wrong-headed enforcement measure and provide perverse incentives for front-line public servants.

This heavy-handed approach nonetheless highlights a nagging problem. Particularly in regions with seasonal industries, EI’s present design is prone to repeat use and diminishes the incentive to migrate in search of a better job.

There are good economic reasons for insuring workers’ income during unexpected unemployment. Employees typically have scant information about the financial health and prospects of their employers. Nor can workers predict the trajectory of their local economy. Most workers would rationally trade off a portion of their income while employed to have some income stability if unemployed.

There is also a case for differentiating the length of benefits on a regional basis and tying benefits to how difficult it is to find a new job. A region may face a temporary economic shock – for example, a swing in commodity prices or technological change that makes a town’s factory redundant.

Insuring workers against these risks makes sense: there are costs to relocate and waves of “for sale” signs only further depress the local economy. Workers will first search for new jobs locally but matching takes time, especially when many others are looking for work.

In the face of such a downturn, EI can also provide some automatic “macro-stabilization” by buoying personal income and consumption when households would otherwise cut their spending. Again this can also be socially beneficial, providing insurance both for workers and for the broader economy.

However, an EI eligibility threshold based simply on the regional unemployment rate is a recipe for over-use.

While we want to enable a temporarily depressed region to rebound, we also want workers to migrate to parts of the country where labour is in demand. Yet, even when a region’s unemployment is persistently high, the current system encourages workers to stay put.

The system also perversely encourages repeat use by seasonal workers, for whom the duration of employment may be scheduled to just meet the EI entrance requirements. This represents an effective wage subsidy to seasonal industries. Such subsidies bias businesses towards hiring low-wage seasonal workers rather than investing in productivity-enhancing equipment.

These features also make the system more costly than necessary, resulting in elevated EI premiums that distort employers’ hiring decisions.

These criticisms of the present EI system are not new. The C.D. Howe Institute , the Mowat Centre’s EI Task Force and the Canadian Chamber of Commerce have all outlined these issues extensively. And there is no shortage of public policy literature around workable solutions – for instance, risk-weighted EI premiums or reduced benefits for frequent claimants.

The problem is politics. No federal government wants to own the necessary reforms. The Chrétien Liberals introduced “intensity provisions” in 1996 to counter repeat use of the system. However, reaping backlash from the Maritimes in the 1997 election, the Liberals promised repeal of these provisions in their 2000 campaign.

Last year, the Harper Conservatives passed amendments to require acceptance of “suitable employment” by frequent EI claimants if the worker is qualified or could become qualified for the given job. This is a laudable first step, although Prime Minister Stephen Harper has continued to insist that the changes won’t impact seasonal workers.

The Atlantic Premiers were outraged and other federal parties called for repeal of these changes. Yet, while they have been quick to lambast the government, the Liberals and NDP seem to argue merely for a return to the status quo rather than advocating for other reforms.

EI reform has languished on the back-burner for too long, dragging on the national economy. Even if certain self-interested voters are wed to the previous regime, the government should be commended for its “suitable employment” requirement. Indeed, EI must be further amended to remedy inefficiencies. A federal government must put principled policy ahead of political opportunism.

Grant Bishop is a graduate from law at the University of Toronto and previously served as an economist at a major Canadian financial institution

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