The struggle to fix employment insurance

NationalPost.com – Financial Post – The struggle to fix employment insurance: Getting Real

Published: July 26, 2009.   Paul Vieira in Ottawa,  Financial Post

As the worst global recession since the Second World War grinds on – although this week, the Bank of Canada declared the downturn over in Canada – workers are facing pay cuts, unpaid leave and layoffs. Labour strife has swelled. The wealth hit from battered investment portfolios and falling home prices is forcing consumers to adjust their expectations, too. Today is the third instalment of the Financial Post’s summer-long “Getting Real” series exploring the reality check now underway.

Legislators and policy analysts have been throwing their share of bricks at the federal Employment Insurance scheme in the belief the system is failing out-of-work Canadians.

Liberal Leader Michael Ignatieff pushed changes to EI to the point where, in an effort to avoid a summer election, Prime Minister Stephen Harper agreed to establish a working group of Conservative and Liberal party officials to study the scheme and propose improvements. The panel is to report back with recommendations in late September.

Certainly, an EI review is welcome, say analysts. The economic downturn and resulting job losses exposed the system’s flaws. What they fear, however, is that the overhaul the program needs will give way to short-term fixes – namely, looser eligibility requirements.

“Personally, I am not confident we are going to get the reform we need because of the recessionary context. If you talk to opposition MPs, they still have a motive to provide additional stimulus,” said Alexandre Laurin, senior policy analyst for the C.D. Howe Institute who is charged with producing a series of analyses on EI for the think-tank.

The opposition parties had pushed the federal Conservative government to adopt a uniform level of entry for a person to claim EI, setting the threshold at 360 hours of work across the nation, compared with the checkerboard requirements now in place – from 420 to 700 hours, depending on the local unemployment rate.

Niels Veldhuis, director of fiscal studies and senior economist at the Fraser Institute, said EI requirements were tightened in the 1990s for a reason. Evidence indicated easier entry levels led to higher unemployment rates as people had less motivation to find work knowing they could count on income support.

“You will make it much easier to get EI … and that will lead to a significant, long-term increase in the unemployment rate, and that is not something that we as an economy can deal with over the long run given that we have an aging population and a declining workforce,” said Mr. Veldhuis of the Vancouver-based think-tank.

Still, a number of analysts contend the current scheme is unfair and needs a fix.

Workers who accummulate the requisite number of hours are able to claim benefits that equate to 55% of their average earnings. But duration depends on the region where the claimant lives. Workers and employers pay premiums, based on each $100 earned, to fund the EI scheme.

Government data indicate the share of unemployed Canadians able to obtain EI has fallen since the tightening of the rules in the 1990s, from a high of 83.8% in 1990 to 44% in 2007, or the most recent year in which such data is available. Broken down by region, 65% of Atlantic Canadians received EI; 49% in Quebec; 40% in Ontario; and 37% in Western Canada.

Of concern now is that the bulk of the job losses in this downturn – roughly 356,600 in the first five months of the year – are in Ontario, which under the EI scheme is generally considered a low-unemployment region.

In a recent note, economists at Toronto-Dominion Bank warned the number of unemployed unable to access EI would likely climb well into next year. So, EI eligibility should be modified, the TD study said, but perhaps not the way opposition politicians would prefer.

The TD economists advocate a “flattening” of requirements, in which, for example, regions with unemployment of less than 10% have the same requisite hours before EI can be collected.

“The truth of the matter is that during an economic downturn, it is no easier to find a job in a region with lower prevailing unemployment than in one with a higher unemployment rate,” wrote the economists, Derek Burleton and Grant Bishop. “While such a case is less compelling during periods of expansion, we still believe that such a sizeable discrepancy in the prevailing entrance requirements could be struck down on the fairness argument.”

The TD study also questions the use of the unemployment rate as a gauge to determine eligibility requirements and the duration of benefits. Instead, EI eligibility requirements should be linked to other key, but esoteric, indicators, such as the seasonally adjusted change in employment; job vacancy rate; and the rate of employee turnover.

Regardless, observers such as Mr. Veldhuis and Mr. Laurin believe the scheme needs to be retooled and become more of an insurance program. The current setup, critics contend, is much like a regional development program that dissuades unemployed people in less wealthy parts of the country to move to where the jobs are.

“Every single business and individual pays the same premium – and when you think about insurance, that is certainly not the way an insurance scheme should operate,” Mr. Veldhuis said.

If policymakers were serious about EI reform, Mr. Veldhuis said, they would look at alternative schemes like the one used in Chile, in which workers pay into an individual account that they can draw on should they lose their job or decide to take time off. The workers’ accounts are topped up by a government contribution via corporate taxes. Upon retirement, any leftover cash in the account is rolled over into the individual’s pension plan.

This is the sort of imaginative EI reform policy analysts are looking for in Canada. But whether Canada’s political environment allows for such creativity is another matter.

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