Solving the welfare enigma – Solving the welfare enigma
Published: Friday, June 20, 2008. Ross Finnie and Ian Irvine, National Post

During the sharp economic decline of the early 1990s, record numbers became dependent on the nation’s income support programs, including Social Assistance (SA) — welfare — the support program of last resort. But the economy recovered, a panoply of SA program changes were adopted. The result was that welfare usage rates fell like a stone and are now half what they were in 1994. This decline is monumental, and stands in stark contrast to the cycles of the ’70s and ’80s, when the numbers drawing SA remained obstinately high through the economic recovery.

Why have welfare numbers declined so dramatically? Is it because the economy provided more jobs, or because welfare is less attractive and eligibility has been tightened, or something else? To answer these questions, we studied welfare dynamics by following a large sample of Canadian tax filers from 1993 to 2005. What did we learn? – Economic conditions, as measured by the unemployment rate, have a strong effect on welfare participation; Canada’s strong economy post-1996 accounts for half of the total decline in welfare use. So while recent decades have seen only meager improvements in wages for lower-and average-skill workers in Canada, improved employment opportunities have had a substantial impact on people at the very bottom of the economic ladder. The work ethic is clearly alive and well, and job opportunities should be the starting point when it comes to helping people off welfare. – The incentives embodied in the welfare system are also important. When benefit amounts rise, more individuals claim benefits and others are slower to move off the system. As a result, the fall in real benefit levels after the mid-1990s played a significant role in driving down welfare participation rates. While more generous benefits provide support to people who need it, they also increasen the number of users. This is especially troublesome if generous SA benefits cause people to forego employment opportunities that could improve their longer-run economic outcomes. – While people often assume that lower employment insurance benefits and more difficult access force individuals on to welfare as an alternative source of income support, our work suggests the opposite: Although the numbers receiving EI benefits declined, we can find no evidence of people substituting welfare for EI. – Changes in welfare eligibility rules and operational procedures appear to have reduced reliance on welfare. These changes included carrots — such as encouraging enrollment in education and training programs — as well as sticks –like making claimants go through more hoops to qualify for benefits and restricting welfare receipts to a limited period. Such initiatives may help achieve specific policy targets, such as reducing SA entry rates of young people who might do better being guided into other programs with better long-run employment effects. It is important, though, that these initiatives avoid denying benefits to the needy.

The federal government’s National Child Benefit program appears to have encouraged individuals with children to move into the labour force — and off welfare — by allowing them to keep a portion of their support benefits when employed, which is not always possible under traditional welfare programs. This program should probably be considered a policy success, although its costs have to be weighed against its benefits.

Finally, the dynamics surrounding welfare entry matter most; it is where individuals are most responsive to economic incentives and policy-related initiatives. Keeping people off welfare in the first instance, rather than attempting to get them off once on, is likely the most effective means of affecting caseloads and reducing longer-run welfare dependency. – Ross Finnie is at the Graduate School of Public and International Affairs at the University of Ottawa, and Ian Irvine is at the Department of Economics at Concordia University. Their C. D. Howe Institute study, The Welfare Enigma: Explaining the Dramatic Decline in Canadians’ Use of Social Assistance, 1993-2005, is available at

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